SOGAZ GROUP

International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report

31 December 2018

SOGAZ GROUP

CONTENTS

INDEPENDENT AUDITOR’S REPORT ...... 3

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Financial Position ...... 6 Consolidated Statement of Profit or Loss and Other Comprehensive Income ...... 7 Consolidated Statement of Changes in Equity ...... 9 Consolidated Statement of Cash Flows ...... 10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Introduction ...... 11 2 Operating Environment ...... 11 3 Summary of Significant Accounting Policies ...... 11 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies ...... 29 5 Adoption of New or Revised Standards and Interpretations ...... 30 6 New Accounting Pronouncements ...... 31 7 Cash and Cash Equivalents ...... 33 8 Deposits with Banks ...... 34 9 Financial Assets at Fair Value through Profit or Loss ...... 34 10 Financial Assets Available for Sale ...... 36 11 Investments in Associates ...... 37 12 Receivables ...... 38 13 Prepayments ...... 41 14 Investment Property ...... 41 15 Financial Assets Held to Maturity ...... 42 16 Premises and Equipment ...... 43 17 Intangible Assets ...... 44 18 Insurance Provisions ...... 45 19 Evaluation of Insurance Liabilities ...... 50 20 Payables ...... 55 21 Other Liabilities...... 55 22 Share Capital and Reserves ...... 56 23 Non-controlling Interest ...... 58 24 Analysis of Premiums and Claims ...... 59 25 Acquisition Costs Net of Commission Income from Ceded Reinsurance ...... 59 26 Other Insurance Income and Expenses ...... 60 27 Interest Income...... 60 28 Administrative and Other Operating Expenses ...... 61 29 Other Operating Income ...... 61 30 Income Tax ...... 62 31 Financial and Insurance Risk Management ...... 65 32 Capital Management ...... 74 33 Contingent Assets and Liabilities...... 75 34 Fair Value of Financial Instruments ...... 77 35 Presentation of Financial Instruments by Measurement Category ...... 83 36 Related Party Transactions ...... 84 37 Main Subsidiaries and Business Combinations ...... 85

SOGAZ GROUP Consolidated Statement of Profit or Loss and Other Comprehensive Income

In millions of Russian roubles Notes 2018 2017

INSURANCE ACTIVITY Gross premiums written 24 224 944 177 247 Premiums ceded (30 061) (32 069) 194 883 145 178 Change in provision for unearned premiums, gross 18 (13 241) (9 472) Change in reinsurers’ share in provision for unearned premiums 18 (1 194) 4 629 (14 435) (4 843)

Net premiums earned 180 448 140 335

Gross claims paid 24 (123 036) (82 972) Reimbursement of claims for risks ceded to reinsurers 25 613 4 077 (97 423) (78 895) Change in loss provision, gross 18 1 160 (28 145) Change in reinsurers’ share of loss provision 18 (22 889) 15 929 (21 729) (12 216) Claims handling expenses (5 946) (3 828)

Net claims incurred (125 098) (94 939)

Acquisition costs net of commission income from ceded reinsurance 25 (17 522) (11 381) Subrogation income 1 231 941 Change in unexpired risk provision 18 - 13 Other insurance income 26 1 749 1 362 Other insurance expenses 26 (7 754) (1 618)

Total result from insurance activity 33 054 34 713

INVESTMENT ACTIVITY Interest income 27 17 493 16 092 Unrealised (losses less gains) / gains less losses from financial assets at fair value through profit or loss (477) 143 Realised (losses less gains) / gains less losses from financial assets at fair value through profit or loss (11) 249 Realised gains / (losses) from financial assets available for sale 43 (149) Dividend income 103 118 Foreign exchange translation gains less losses / (losses less gains) 3 940 (564) Other investment (losses less gains) / gains less losses (534) 91

Total result from investment activity 20 557 15 980

Administrative and other operating expenses 28 (19 441) (15 895) Other operating income 29 6 240 4 516 Share of profit of associates 11 23 078 62

Profit before tax 63 488 39 376 Income tax expense 30 (12 970) (8 814)

Profit for the year 50 518 30 562

The notes set out on pages 11 to 88 form an integral part of these consolidated financial statements 7 SOGAZ GROUP Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued)

In millions of Russian roubles Notes 2018 2017

OTHER COMPREHENSIVE (LOSS) / INCOME: Items that may be reclassified subsequently to profit or loss: (Losses) / gains arising from financial assets available for sale 22 (828) 455 Realised (gains) / losses transferred to profit or loss 22 (43) 149 Change in currency translation reserve 22 82 40 Share of other comprehensive income of associates 11, 22 - 21 Income tax recognised directly in other comprehensive income 22, 30 174 (125)

Items that may not be reclassified subsequently to profit or loss: Change in revaluation reserve for premises 16, 22 (202) (429) Income tax on revaluation reserve for premises 22, 30 43 83

Total other comprehensive (loss) / income for the year 22 (774) 194

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 49 744 30 756

Profit attributable to: Shareholders of the Company 50 507 30 554 Non-controlling interest 23 11 8

50 518 30 562

Total comprehensive income attributable to: Shareholders of the Company 49 697 30 724 Non-controlling interest 23 47 32

49 744 30 756

The notes set out on pages 11 to 88 form an integral part of these consolidated financial statements 8 SOGAZ GROUP Consolidated Statement of Changes in Equity

Attributable to shareholders of the Company Revalua- Non- Fair value reserve Currency tion reserve controlling Share Share Treasury for financial assets translation for Retained interest Total In millions of Russian roubles Notes capital premium shares available for sale reserve premises earnings Total (Note 23) equity

31 December 2016 25 278 3 (770) 30 134 1 523 60 236 86 434 122 86 556

Profit for the year ------30 554 30 554 8 30 562 Other comprehensive income / (loss) 22 - - - 500 16 (346) - 170 24 194

Total comprehensive income / (loss) for the year - - - 500 16 (346) 30 554 30 724 32 30 756

Disposal of treasury shares 37 - - 770 - - - - 770 - 770 Disposal of subsidiaries 23 ------(3) (3) Dividends declared 22 ------(8 500) (8 500) (2) (8 502)

31 December 2017 25 278 3 - 530 150 1 177 82 290 109 428 149 109 577

Profit for the year ------50 507 50 507 11 50 518 Other comprehensive (loss) / income 22 - - - (697) 46 (159) - (810) 36 (774)

Total comprehensive (loss) / income for the year - - - (697) 46 (159) 50 507 49 697 47 49 744

Disposal of fixed assets 16 - - - - - (9) 9 - - - Repurchase of treasury shares 37 - - (54 992) - - - - (54 992) - (54 992) Realisation of treasury shares 37 - 1 032 54 992 - - - - 56 024 - 56 024 Dividends declared 22 ------(8 500) (8 500) - (8 500)

31 December 2018 25 278 1 035 - (167) 196 1 009 124 306 151 657 196 151 853

The notes set out on pages 11 to 88 form an integral part of these consolidated financial statements 9 SOGAZ GROUP Consolidated Statement of Cash Flows

In millions of Russian roubles Notes 2018 2017

Cash flows from operating activities Gross premiums received 212 024 176 473 Ceded premiums paid (31 975) (24 584) Gross claims paid (115 817) (78 518) Reimbursement of claims ceded to reinsurers, received 22 543 4 188 Claims handling expenses paid (5 354) (3 277) Acquisition costs paid (19 665) (11 223) Subrogation income received 784 616 Proceeds from direct claims settlement transactions 2 024 3 668 Payments under direct claims settlement transactions (11 268) (7 222) Salary and other employee benefits paid (7 944) (5 843) Administrative and other operating expenses paid (12 753) (9 098) Income from obligatory medical insurance operations, received 4 199 2 768 Other operating income received 1 670 951 Income tax paid (5 140) (4 624)

Net cash from operating activities 33 328 44 275

Cash flows from investing activities Proceeds less payments from deposits with banks placed and withdrawn 44 610 (1 890) Acquisition of financial assets held to maturity (36 673) (7 402) Acquisition of financial assets available for sale (25 642) (46 620) Proceeds from realisation and redemption of financial assets held to maturity 20 110 1 245 Proceeds from realisation and redemption of financial assets available for sale 19 726 8 593 Interest received 18 854 16 325 Dividend income paid to former shareholders of subsidiary that was declared before gaining control over subsidiary (11 096) - Cash received from realisation of financial assets at fair value through profit or loss less of cash used for acquisition 1 835 (3 764) Acquisition of intangible assets 17 (753) (236) Acquisition of premises and equipment 16 (726) (918) Proceeds from disposal of subsidiaries 37 278 976 Acquisition of investment property 14 (193) (108) Cash inflow resulting from gaining control over subsidiaries less cash and cash equivalents of subsidiary acquired 37 126 - Dividend income 120 121 Proceeds from disposal of premises and equipment 16 28 164 Cash inflow resulting from other investing activities 74 162 Cash outflow resulting from other investing activities (56) (97)

Net cash from / (used in) investing activities 30 622 (33 449)

Cash flows from financing activities Repurchase of treasury shares 22 (54 992) - Dividends paid to shareholders of the Company (8 500) (8 500) Repayment of finance lease liability - (9)

Net cash used in financing activities (63 492) (8 509)

Effect of exchange rate fluctuations on cash and cash equivalents 1 095 (699)

Net increase in cash and cash equivalents 1 553 1 618 Cash and cash equivalents at the beginning of the year 7 5 631 4 026 Cash and cash equivalents relating to assets of a disposal group held for sale, at the beginning of the year - (13)

Cash and cash equivalents at the end of the year 7 7 184 5 631

The notes set out on pages 11 to 88 form an integral part of these consolidated financial statements 10 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

1 Introduction

These consolidated financial statements of INSURANCE COMPANY OF GAZ INDUSTRY SOGAZ (hereinafter – the “Company”) and its subsidiaries (together referred to as the “Group” or “SOGAZ GROUP”) have been prepared in accordance with International Financial Reporting Standards (hereinafter – “IFRS”) for the year ended 31 December 2018.

The Company was incorporated and is domiciled in the Russian Federation. The Company is a joint-stock company and was set up in accordance with Russian legislation.

Principal activity. The principal activity of the Group is provision of insurance services. The Group also renders non-insurance related services (Note 37). The Company operates under insurance licenses issued by the Central bank of the Russian Federation. Insurance business written by the Group includes property, liability, medical, personal accident, life insurance and reinsurance. The Group has also contracted with the Territorial funds for obligatory medical insurance (hereinafter – “TFOMI”) that carry out obligatory medical insurance (hereinafter – “OMI”) programs to provide citizens of the Russian Federation with free of charge medical services through certain appointed insurers, including the Group. The Group has contracted with TFOMI to administer a portion of this program and receives commission for providing this service.

At 31 December 2018 21,19% of the Company’s shares (31 December 2017: 21,19%) are owned by PJSC Gazprom and its subsidiaries, 32,30% shares (31 December 2017: 32,30%) owned by LLC Akvila; 16,54% shares (31 December 2017: 16,54%) owned by LLC SG-Invest. The remaining 29,97% shares of the Company (31 December 2017: 29,97%) are owned by minority shareholders. At 31 December 2018 and 31 December 2017 none of the parties is an ultimate controlling party.

At 31 December 2018 the Company had 91 branches (31 December 2017: 91) in the Russian Federation. At 31 December 2018 the subsidiaries of the Group in their turn had 73 branches (31 December 2017: 44) in the Russian Federation. The number of the Group’s staff employees at 31 December 2018 was 17 361 (31 December 2017: 10 800). The list of principal consolidated subsidiaries and associates is disclosed in Notes 37 and 11 accordingly.

Place of business. Akademika Sakharova av., 10, Moscow, 107078, Russian Federation.

Presentation currency. These consolidated financial statements are presented in millions of Russian roubles (hereinafter – “RR million”).

2 Operating Environment

The Russian Federation. The Russian Federation continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of Russian economy is highly dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

Russian economy has been negatively impacted by sanctions imposed on the Russian Federation by a number of countries. Russian rouble interest rates remain high. The combination of the above resulted in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, that could negatively affect the Group’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances.

3 Summary of Significant Accounting Policies

Basis of preparation. These consolidated financial statements have been prepared in accordance with IFRS. The consolidated financial statements are prepared in accordance with the historical cost convention except as disclosed in the accounting policies below.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all periods presented in these consolidated financial statements, unless otherwise stated.

11 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

The preparation of these consolidated financial statements in accordance with IFRS requires the use of estimates and assumptions that affect reported amounts of assets and liabilities, contingent assets and liabilities at the date of the consolidated financial statements, and amounts of income and expenses for the period recognised in these consolidated financial statements. Although these estimates are based on management’s best knowledge of current events and operations, actual results ultimately may differ from those estimates (Note 4).

Consolidated financial statements. Subsidiaries are those investees that the Group controls because it (i) has the power to direct relevant activities of the investees that significantly affect their returns, (ii) has the exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of relevant activities of the investee need to be made. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee.

Subsidiaries are consolidated from the date when control is transferred to the Group, and are deconsolidated from the date when control ceases. The acquisition method of accounting is used to account for acquisition of subsidiaries. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

Non-controlling interest is the part of net results and equity of a subsidiary attributable to interests that are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Group’s equity.

The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree. Non- controlling interests that are not present ownership interests are measured at fair value.

Goodwill is measured by deducting net assets of the acquiree from the aggregate of the following amounts: the amount of consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and the fair value of the Group’s interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it has identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement.

The consideration transferred for the acquiree is measured at the fair value of assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt instruments are deducted from their carrying amount and all other transaction costs associated with the acquisition are expensed.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policy.

Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recognised as an equity transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as an equity transaction in the consolidated statement of changes in equity.

12 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Associates. Associates are entities over which the Group has direct or indirect significant influence, but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identified in acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of investments in associates.

Other post-acquisition changes in the Group’s share of net assets of associates are recognised as follows: (i) the Group’s share of profits or losses of associates is recognised in profit or loss within the share of profit of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii) the Group’s share in other changes of the carrying value of net assets of associates is recognised in profit or loss within the share of profit of associates.

However, when the Group’s aggregate share of associate losses equals or exceeds its share in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

In the consolidated statement of changes in equity, the Group’s share in other comprehensive income of associates is recognised within the reserve which other comprehensive income of associates is related to.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s share in associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

The Group tests for impairment the carrying amount of each investment in an associate by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with the carrying amount. An impairment loss recognised in those circumstances is not allocated to any asset, including goodwill that forms part of the carrying amount of investments in associates. Accordingly, any reversal of that impairment loss is recognised to the extent that the recoverable amount of the investment subsequently increases. Impairment loss and reversal of that impairment loss are both recognised in profit or loss.

Disposal of subsidiaries and associates. When the Group ceases to have control or significant influence, any retained share in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained share in associate or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities. This means that when amounts previously recognised in other comprehensive income in respect of a subsidiary are to be reclassified to profit or loss following the sale of assets or liabilities to which they relate, they should be reclassified to profit or loss in a similar way at the date when control over this subsidiary is lost. Consequently, amounts previously recognised in other comprehensive income in respect of a subsidiary and subject to be reclassified directly to retained earnings following the sale or disposal of assets or liabilities to which they relate, should also be reclassified to retained earnings when control over this subsidiary is lost.

Financial instruments – key measurement terms. Depending on their classification, financial instruments are carried at fair value or amortised cost as described below.

Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is a quoted price in an active market. An active market is one where transactions with the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the quoted price for the individual asset or liability multiplied by the quantity held by the Group. This is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity of assets and liabilities held by the Group and placing orders to sell the position in a single transaction might affect the quoted price.

Management considers the fair value equal to a price within the bid spread, as the most representative in the circumstances.

13 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received in the sale of an asset for a particular risk exposure or paid to transfer a liability for a particular risk exposure in an orderly transaction between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Group: (a) manages the group of financial assets and financial liabilities on the basis of the Group’s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the Group’s risk management or investment strategy; (b) provides information on that basis about the group of financial assets and financial liabilities to the Group’s management; and (c) market risks, including duration of the Group’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities are substantially the same.

Valuation techniques such as discounted cash flows model or models based on similar arm’s length transactions or on the present value of the investee are used to measure fair value of certain financial instruments for which external market pricing information is not available (Note 34).

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and stock exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs, internal administrative or holding costs.

Amortised cost is the initial cost of an asset less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium and fees deferred at origination, are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position.

The effective interest method is a method of allocating interest income or interest expenses over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount of the instrument.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for premium or discount that reflect the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate.

Initial recognition of financial instruments. Financial assets at fair value through profit or loss are initially recognised at fair value. All other financial assets are initially recognised at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price.

A gain or loss on initial recognition is only recognised if there is a difference between fair value and transaction price that can be evidenced by other observable current market transactions with the same instrument or by a valuation technique, whose inputs include only data from observable markets.

All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention are recognised at transaction date, which is the date when the Group commits to buy or sell a financial asset. All other purchases are recognised when the Group becomes a party to the contractual provisions of the financial instrument.

14 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred rights to cash flows from financial assets or entered into a pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale.

Derecognition of financial liabilities. The Group derecognises its financial liabilities when the obligation is discharged, transferred, cancelled or expired. Where an existing financial liability is replaced by another from the same creditor on substantially different terms, or the terms of an existing liability are substantially modified, the original liability is derecognised and the new liability is recognised, and the difference in the respective carrying amounts is recognised in profit or loss.

Cash and cash equivalents. Cash and cash equivalents are items that are readily convertible to known amounts of cash and that are subject to insignificant changes in value. Cash and cash equivalents include cash on hand, settlement accounts with banks and overnight deposits. Funds restricted for a period of more than one banking day on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost.

Deposits with banks. Deposits with banks are funds that the Group advances to counterparty credit organisations on the basis of deposit contracts for a period of more than one banking day. Deposits with banks are carried at amortised cost.

Financial assets at fair value through profit or loss. Financial assets at fair value through profit or loss comprise of financial assets held for trading and financial assets designated irrevocably, at initial recognition, into this category.

Financial assets held for trading are financial assets that are either acquired for generating a profit from short- term fluctuations in price or trader`s margin, or if they are included in a portfolio that has a recent actual pattern of short-term profit-taking. The Group classifies financial assets as held for trading if it has an intention to sell them within a short period after the acquisition. The Group may choose to reclassify a non-derivative asset held for trading out of the fair value through profit or loss category if the asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of the fair value through profit or loss category only in rare circumstances arising from a single event that is unusual and highly unlikely to reoccur in the near term.

Other financial assets at fair value through profit or loss include financial assets designated irrevocably, at initial recognition, into this category. Management designates financial assets into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets and liabilities or recognising gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with risk management or investment strategy, and information on that basis is regularly provided to and reviewed by management of the Group.

Financial assets at fair value through profit or loss are carried at fair value. Interest income on financial assets at fair value through profit or loss calculated using the effective interest method is presented in profit or loss as interest income. Dividends are recognised as dividend income when the Group’s right to receive the relevant income is established and it is probable that the dividends will be collected. All other components of changes in fair value and gains or losses on derecognition are recognised, accordingly, as unrealised and realised gains less losses from financial assets at fair value through profit or loss in the period when they arise.

Derivative financial instruments. Derivative financial instruments are measured at fair value through profit or loss and include derivative financial instruments held for trading. Those instruments include derivative financial instruments with shares and stock indexes as underlying assets. Subsequent measurement of those assets is based on public stock-exchange quotes or quotes of derivative financial instruments issuers. In case of absence of information about current quotes Black-Scholes option pricing model is used for determining fair value.

15 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Derivative financial instruments are carried as assets when their fair value is positive and as liabilities when the fair value is negative. Changes in the fair value of derivative instruments and gains or losses from disposal are included in profit or loss, accordingly, as unrealised and realised gains less losses from financial assets at fair value through profit or loss.

Financial assets available for sale. This category includes financial assets that the Group intends to hold for an indefinite period and that may be sold in response to needs for liquidity or fluctuations in interest rates, exchange rates or qouted prices. The Group classifies financial assets as available for sale at the acquisition date.

Financial assets available for sale are carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and is recognised in profit or loss.

Dividends on available for sale equity instruments are recognised in profit or loss as dividend income when the Group’s right to receive payment is established and it is probable that the dividends will be collected. Income and expenses from revaluation of foreign currency securities are recognised in profit or loss. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, when the cumulative gain or loss is reclassified from other comprehensive income to profit or loss.

Impairment losses are recognised in profit or loss when incurred as a result of one or more events that occurred after the initial recognition of financial assets available for sale. A significant or ongoing decline in the fair value of a financial asset below its cost is an indicator that it is impaired.

The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is reclassified from other comprehensive income to profit or loss. Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income.

If in a subsequent period the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss.

Financial assets held to maturity. This category includes non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has both the intention and ability to hold to maturity. Financial asset is not classified as held-to-maturity if the Group has the right to require that the issuer repay or redeem the financial asset before its maturity, because paying for such a feature is inconsistent with expressing an intention to hold the asset until maturity, except when the right of redemption before maturity arises due to worsening financial position and the risk of default of the issuer. Management determines the classification of financial assets held to maturity at their initial recognition and reassesses the appropriateness of that classification at the end of each reporting period. Financial assets held to maturity are carried at amortised cost using effective interest method less provision for impairment.

Receivables and prepayments. Receivables are accounted for on the accrual basis and are carried at amortised cost. Prepayments are recognised at the payment date and are charged to profit or loss when services or goods are provided.

Insurance and reinsurance receivables include settlements with agents, brokers, insurers and reinsurers, as well as subrogation and recourse settlements. Reinsurance receivables and payables are offset for a counterparty where the legal right for this offset exists.

Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss when incurred as a result of one or more events that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the expected future cash flows of the financial asset or a group of financial assets that can be reliably estimated.

If the Group determines that no objective evidence exists that impairment has incurred for an individually assessed financial asset, the asset is included into a group of financial assets with similar credit risk characteristics and is collectively assessed for impairment.

16 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

The primary factor that the Group considers in determining whether a financial asset is impaired is its overdue status. The following other principal criteria are used to determine whether there is an objective evidence that an impairment loss has occurred:  Any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;  The counterparty experiences a significant financial difficulty as evidenced by counterparty’s financial information that the Group obtains;  The counterparty considers bankruptcy or a financial reorganisation; or  There is an adverse change in the payment status of the debtor as a result of changes in the national or local economic conditions that impact the debtor.

The Group individually assesses impairment of receivables from individually significant clients on the basis of contractual future cash flows, available information on counterparties and the extent the existing receivables are covered by other provisions.

For other counterparties that are not individually significant clients, financial assets are grouped by similar credit risk characteristics. Those characteristics relate to the estimation of future cash flows for groups of such assets and indicate the debtors’ ability to pay all amounts due in accordance with the contractual terms of the assets being evaluated.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the debtor or issuer, impairment is assessed using the original effective interest rate before the modification of terms. The renegotiated asset is then derecognised and a new asset is recognised at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows.

Impairment losses are recognised through creating a provision necessary to write down the asset’s carrying amount to the present value of expected cash flows discounted at the original effective interest rate of the asset. If in a subsequent period the amount of impairment loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the impairment loss provision through profit or loss.

Uncollectible assets are written off against the related impairment loss provision after all necessary procedures to recover the asset have been completed and the amount of ultimate loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss.

Investment property. Investment property is the property held by the Group to earn rental income or for capital appreciation, or both, and is not occupied by the Group. Investment property includes premises and land plots.

Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value updated to reflect market conditions at the end of the reporting period. Fair value of investment property is the price that would be received from sale of the asset in an orderly transaction, without deduction of any transaction costs. Fair value of the Group’s investment property is determined based on reports of independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience in valuation of investment property of similar location and category.

Investment property is not depreciable. Earned rental income is recognised in profit or loss within other operating income. Gains and losses resulting from changes in the fair value of investment property are recognised in profit or loss within other investment gains less losses.

Premises and equipment. Premises and equipment are recognised at cost, restated to the equivalent purchasing power of Russian rouble at 31 December 2002 for assets acquired prior to 1 January 2003 with allowances made for expenses on bringing them to a feasible condition in accordance with management intentions, or revalued amounts, as described below, less accumulated depreciation and provision for impairment.

17 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Premises are annually revaluated as of 31 December based on the fair value expert report made by independent appraiser in accordance with IFRS 13 Fair Value Measurement. Revaluation implies proportional recalculation of property cost and its accumulated depreciation at the date of revaluation with the recalculation ratio defined by dividing the fair value of the property by its cost at the date of revaluation less accumulated depreciation at the same date. As a result, the difference between the cost and recalculated depreciation after revaluation is equal to its fair value.

Increases in the carrying amount arising on revaluation are credited to other comprehensive income and equity as a change in a revaluation reserve for premises. Decreases that offset previous increases of the same asset are recognised in other comprehensive income and decrease the previously recognised revaluation reserve for premises in equity; all other decreases are charged to profit or loss.

The revaluation reserve for premises included in equity is transferred directly to retained earnings when the revaluation surplus is realised on writing-off or disposal of the asset.

Costs of minor repairs and day-to-day maintenance are expensed when incurred. Costs of replacing major parts of premises and equipment items are capitalised, and the replaced part is written-off.

At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any indication exists, management estimates the recoverable amount, which is determined as the higher of the asset’s fair value less costs to sell and its value in use. In case of impairment the carrying amount of premises and equipment is reduced to the recoverable amount and the impairment loss is recognised in profit or loss to the extent it exceeds the previous revaluation surplus in equity.

Impairment loss recognised for an asset in prior periods is reversed if there has been a change in estimates used to determine the asset’s value in use or fair value less costs to sell.

Gains or losses on disposal determined by comparing proceeds with carrying amount are recognised in profit or loss within other operating income or administrative and other operating expenses.

Depreciation. Land and construction in progress are not depreciated. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over the following estimated useful lives: Useful lives in years

Premises 30 Office and computer equipment 3-7 Transport 3-7 Other equipment 5-10

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less estimated costs of disposal, if the asset would have already been of the age and the condition expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.

Intangible assets. The Group’s intangible assets, except for goodwill, have definite useful lives and generally include computer software licenses, computer software development costs and intangible assets identified in business combinations, including customer base, present value of acquired in-force business and distribution channels right-of-use. Amortisation is applied using a straight-line basis over their estimated useful lives, from 1 to 18 years.

Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring the specific software to use. Expenditure, which enhances or extends the performance of computer software programs beyond their original specifications is recognised as a capital improvement and added to the original cost of the software.

18 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Intangible assets identified in business combinations are recognised at fair value at the moment of obtaining control over the operating activities of the acquirees separately from goodwill. The Group determines fair value of identified intangible assets even if they were not accounted for in financial statements of an acquiree.

Costs associated with maintaining computer software programs are recognised as expenses when incurred. Costs that are directly associated with identifiable software products controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

The Group tests intangible assets for impairment whenever there are indications that they may be impaired.

Value of acquired in-force business (hereinafter – “PVIF”). When a portfolio of insurance contracts is acquired the Group determines the present value of distributable earnings from the acquired portfolio that approximates the difference between the fair value of the acquired insurance contract liabilities and their book value.

The Group uses an expanded presentation that splits the fair value of acquired insurance contracts into the following components:

 Insurance contract liabilities measured in accordance with the Group’s accounting policies;  Deferred acquisition costs measured in accordance with the Group`s accounting policies;  An intangible asset representing the value of acquired in-force business (hereinafter – “PVIF asset”).

After initial recognition, PVIF asset is measured at cost less accumulated amortisation and accumulated impairment losses. PVIF asset is amortised on a straight line basis over the useful life of the acquired insurance contracts. Amortisation expense is recognised within other insurance expenses.

The recoverability of PVIF is considered as part of the liability adequacy test performed at the end of each reporting period.

Other intangible assets, identified in business combinations. Other intangible assets identified in business combinations comprise customer base and distribution channels right-of-use. The useful life of these assets is determined in accordance with the expected pattern of consumption and contract period of control over the assets. These assets are amortised over their useful lives, using the straight line method. Amortisation expense is recognised within administrative and other operating expenses.

An impairment test for other intangible assets identified in business combinations is performed whenever there is an indication of impairment.

Goodwill. Goodwill is carried at cost less accumulated impairment losses. The Group tests goodwill for impairment annually.

Goodwill is allocated to cash-generating units, or groups of cash-generating units, that are expected to benefit from synergies of business combination. Such units or groups of units represent the lowest level at which the Group monitors goodwill.

Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the disposed operation, generally measured on the basis of the relative values of the disposed operation and the portion of the cash-generating unit which is retained.

Assets held for sale and assets of a disposal group held for sale. Assets held for sale and assets of a disposal group held for sale are classified in the consolidated statement of financial position as assets held for sale and assets of a disposal group held for sale and liabilities directly associated with assets of a disposal group held for sale if their carrying amount will be recovered principally through a sale transaction (including loss of control over a subsidiary holding the assets), within twelve months after the end of the reporting period.

19 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group’s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for sale at a reasonable price; (d) the sale is expected within one year and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Assets held for sale and assets of a disposal group held for sale classified in the current period’s consolidated statement of financial position as held for sale are not reclassified or represented in the comparative consolidated statement of financial position to reflect the classification at the end of the current reporting period.

Assets of a disposal group held for sale are a group of assets (current and non-current) to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction.

Assets held for sale and assets of a disposal group held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Held for sale premises and equipment and intangible assets are not depreciated.

Liabilities directly associated with disposal groups that will be transferred in the disposal transaction are presented separately in the consolidated statement of financial position.

Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit or loss on a straight-line basis over the period of lease.

Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset.

Finance lease liabilities. Where the Group is a lessee in a lease which transfers substantially all risks and rewards incidental to ownership to the Group, the assets leased are capitalised in premises and equipment at the commencement of the lease at the lower of the fair value of leased assets, and the present value of minimum lease payments. Each lease payment is allocated between discharging liability and finance charges so as to achieve a constant rate on the finance lease balance outstanding. The corresponding rental obligations, net of future finance charges, are included in other financial liabilities of the consolidated statement of financial position.

Interest expense is charged to profit or loss over the lease period using the effective interest method. Assets acquired under finance leases are depreciated over their useful lives, or the shorter lease term if the Group is not reasonably certain that it will obtain ownership by the end of the lease term.

Payables. Payables are non-derivative financial liabilities carried at amortised cost.

Insurance and investment contracts – classification. The Group enters into contracts that contain insurance risk or financial risk, or both.

Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. The Group defines as significant insurance risk the possibility of having to pay a benefit on the occurrence of an insurance event that is at a certain percentage more than the benefit payable if an insurance event did not occur.

Insurance risk exists when there is an uncertainty in respect of the following matters at inception of the contract: occurrence of insurance event, date of insurance event occurrence, and the claim amount in respect of insurance event occurred.

Investment contracts are the contracts with significant financial risk transferred rather that significant insurance risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of price or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party of the contract. Investment contracts are recognised in accodance with of IAS 39 Financial Instruments: Recognition and Measurement.

20 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Investment contracts are further classified as being either with discretionary participation feature (hereinafter – “DPF”) or without it. DPF is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits that are based on perfomance of assets held in DPF portfolio. The amount or timing of those benefits are determined by the Group.

Investment contracts liabilities without DPF are recognised in accordance with IAS 39 Financial Instruments: Recognition and Measurement in other financial liabilities when cash is received. Subsequent to initial recognition investment contracts liabilities are carried at amortised cost. Income and expenses from investment contracts liabilities including income / expenses upon initial recognition, foreign exchange gains / losses and effective interest rate changes, are recognised within administrative and other operating expenses or other operating income. Investment contracts liabilities without DPF are derecognised when the investment contract expires, is discharged or is cancelled.

Description of insurance products. The Group offers insurance products covering all major insurance risks. The Group’s main lines of insurance business are as follows:

 Property insurance;  Health insurance / voluntary medical insurance (hereinafter – “VMI”);  Personal accident insurance;  Obligatory motor third party liability insurance of motor vehicle owners (hereinafter – “OMTPL”);  Motor own damage insurance (hereinafter – “CASCO”);  Obligatory state personal accident insurance;  Aircraft insurance;  Mortgage insurance;  Cargo insurance;  Voluntary liability insurance;  Space objects insurance;  Hull and marine insurance;  Obligatory insurance of third party liability of owners of hazardous production facilities (hereinafter – “OIHF”);  Obligatory third party liability insurance of carriers (hereinafter – “OTPLIC”);  Life insurance.

Short-term insurance contracts include property, VMI, personal accident insurance, motor, liability insurance and short-term life insurance contracts.

Property insurance ensures that the Group’s clients receive compensation for the damage caused to their property or ensures their financial interests. Clients are also indemnified for income losses caused by their inability to use the insured property in their economic activities as a result of occurrence of an insurance event (business interruption).

VMI is designed to provide the Group’s clients with paid medical services. VMI contracts are entered into only if at the inception of the contract the Group is unsure of the probability, timeline and amounts of cash outflows connected with this type of insurance.

Personal accident insurance – indemnification of clients that have suffered damage caused to their life or health as a result of personal accident or illness.

OMTPL protects the Group’s clients against the risk of third party liability of motor vehicle owners which can occur as a result of causing harm to third parties’ life, health or property while using motor vehicles.

21 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

CASCO – protection for risks of theft and damage of motor vehicles belonging to the insured.

Obligatory state personal accident insurance is required for public officers, including military officers, under several legal acts. Life and health of the insured during the period of service are the insurance objects.

Aircraft insurance – the Group insures property interests of the insured related to legal possession, use and disposal of an aircraft.

Mortgage insurance – insurance of creditors and borrowers risks.

Cargo insurance – the Group insures property interests of the insured related to legal possession, use and disposal of cargo as a result of its loss or damage.

Voluntary liability insurance protects the Group’s clients against the risk of causing harm to third parties as a result of their legitimate activities. Damages covered include both contractual and non-contractual events. The typical protection offered is designed for employers who become legally liable to pay compensation to the injured employees and for individuals and legal entities who become liable to pay compensation to a third party for bodily harm or property damage in accordance with Russian law.

Space objects insurance – the Group insures risks related to space activity.

Hull and marine insurance – the Group insures property interests of the insured related to legal possession, use and disposal of insured vessels, as well as the risk of loss or damage to the vessel or its parts at the construction site.

OIHF – obligatory insurance for owners of hazardous facilities against damage resulting from an accident at a hazardous facility. The Group insures third party liability of hazardous facilities owners against the damage to persons affected.

OTPLIC is the obligatory third party liability insurance of carriers for causing harm to life, health or property of passengers while providing transportation services.

Short-term life insurance contracts protect the Group’s clients from the consequences of events, such as death or disability that would affect the ability of clients or their dependants to maintain their current level of income. Guaranteed benefits paid on occurrence of the specified insurance event are fixed. Maturity or surrender benefits are not provided for by this type of contracts.

Long-term life insurance contracts with fixed and guaranteed terms allow for financial support under unfavourable circumstances (e.g. death or survival) or, vice versa, put aside funds at the expense of the guaranteed rate of return. Such insurance contracts allow carrying out a long-term financial planning.

Non-life insurance

 Gross premiums written. Upon inception of a liability under insurance contract, premiums are recognised as written and are earned on a pro-rata basis over the term of the policy coverage. Under insurance contracts, for which the expected loss ratio is significantly affected by the seasonal factor, premiums are earned with consideration of this factor.  Provision for unearned premiums. Provision for unearned premiums (hereinafter – “UPR”) represents the portion of premiums written that relate to unexpired term of policies in force at the end of the reporting period. For insurance products with a minor seasonality effect on claims paid, UPR is calculated on a time apportionment basis. With respect to insurance products with a significant seasonality effect on claims paid, UPR is calculated in such a way so that premium earned for a period would change pro rata the seasonal risk factor.  Gross claims paid. Claims are recognised in profit or loss as incurred based on the evaluated liability for compensation payable to the insured or third parties suffered from occurrence of insurance event.

22 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

 Claims handling expenses. Claims handling expenses are recognised in profit or loss as incurred and include direct expenses related to negotiations and subsequent claims handling, as well as indirect expenses, including expenses of claims handling department and administrative expenses directly related to activities of this department.  Loss provision. Loss provision represents the accumulation of estimates for ultimate losses and includes outstanding claims provision (hereinafter – “OCP”) and provision for losses incurred but not yet reported (hereinafter – “IBNR”). Loss provision is estimated on an undiscounted basis due to relatively quick pattern of claims notification and payment.  OCP is provided in respect of claims reported, but not settled at the reporting date. The estimation is made on the basis of information received by the Group during investigation of insurance event, including the information received after the reporting date.  IBNR is determined by the Group by lines of business using actuarial methods, and includes assumptions based on prior years’ claims and claims handling experience. The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated (Note 19). Resulting adjustments are recognised in profit or loss as incurred.  Provision for claims handling expenses (hereinafter – “PCHE”) is determined by the Group by lines of business based on historical experience and actual amounts of claims handling expenses.  Subrogation asset. A subrogation asset is calculated using actuarial methods for individual lines of business and represents the Group’s estimation of future inflows from offenders on losses incurred under insurance contracts where the Group acts as an insurer, while an offender under the insurance contract is a party that is not a policyholder under insurance contracts signed by the Group. Subrogation asset is recognised within the insurance reserves.

Life insurance

 Gross premiums written. Premiums from traditional life insurance are recognised in profit or loss to the extent of the first premium instalment – at the earliest of the date of liability inception and the date of agreement, and to the extent of next instalments – when they become due from the policyholder. Premiums that are not associated with significant insurance risk are not recognised as gross premiums written.  Gross claims paid. Claims including personal income tax withheld by the Group are recognised in profit or loss as incurred.  Claims handling expenses. Claims handling expenses are recognised in profit or loss as incurred and include direct expenses related to negotiations and subsequent claims handling, as well as indirect expenses, including expenses of claims handling department.  Provisions for life insurance contracts. The methods of calculating provisions for life insurance contracts are disclosed in Note 19.  Discretionary participation feature. The Group has discretionary participation feature in relation to the policyholder / the insured embedded in some insurance contracts. The Group does not consider this feature separately from an insurance contract.

Liability adequacy test. At each reporting date the Group assesses whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of insurance liabilities less related deferred acquisition costs and related intangible assets is inadequate in the light of the estimated future cash flows, the deficiency is recognised in insurance provisions in the consolidated statement of financial position. When unearned premiums are insufficient to cover claims and expenses, that may be incurred after the end of the reporting period, the Group recognises unexpired risk provision (hereinafter – “URP”). To estimate URP the Group uses historical experience and forward looking assumptions of ultimate loss ratios including claims handling expenses, and the level of in-force portfolio maintenance expenses. The expected losses are calculated considering events that have occurred prior to the reporting date. URP calculated at the reporting date is recognised in profit or loss initially by writing off deferred acquisition costs and then as a change in URP.

23 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Reinsurance. The Group assumes and cedes reinsurance in the normal course of business. Ceded reinsurance contracts do not relieve the Group from its obligations to policyholders. Amounts recoverable from or due to reinsurers are measured consistently with amounts associated with respective insurance contracts and in accordance with the term of each reinsurance contract. Reinsurance assets include balances due from reinsurance companies in respect of reimbursement for claims paid, including claims handling expenses, and premiums under assumed reinsurance contracts. Reinsurance payables are obligations of the Group to transfer reinsurance premiums to reinsurers and obligations arising out of claims assumed.

Subrogation income. The Group has a right to pursue parties responsible for loss to pay some or all costs related to claims settlement process of the Group (recourses, subrogation). Subrogation reimbursements are recognised as income only if the Group is confident in receipt of these amounts from the third parties.

Acquisition costs and deferred acquisition costs. Acquisition costs represent brokerage and agent commissions, commissions for assumed reinsurance, surveyor expenses, obligatory payments to Russian association of motor insurers and printing policies costs that vary and depend on the volume of premiums on acquisition or renewal of insurance policies, as well as indirect costs, including expenses of sales departments including labour costs and social security expenses.

Acquisition costs that could be directly allocated to insurance contracts are deferred and amortised over the period in which the related gross premiums written are earned. Deferred acquisition costs are calculated separately for each insurance contract.

Commission income from ceded reinsurance and deferred commission income. The Group receives commissions for ceding premiums to reinsurers. This type of commission is recognised within insurance activity result in profit or loss. Commission income from ceded reinsurance that represent the recovery of acquisition costs reduces the applicable unamortised acquisition costs in such a manner that net acquisition costs are capitalised and charged to expenses pro rata to net insurance income recognised. Changes in deferred commission income on reinsurance ceded are recognised in profit or loss within acquisition costs net of commission income from ceded reinsurance.

Obligatory medical insurance. The Federal fund for obligatory medical insurance carries out the OMI program in order to provide citizens of the Russian Federation with free of charge medical services via certain insurers, appointed under Russian legislation, including the Group, that have contracted with TFOMI to administer a portion of this program. Insurance medical institutions carry out OMI activities based on OMI financial support contracts signed with TFOMI and contracts for provision and payment of OMI medical services with medical institutions (hereinafter – “MI”).

The Group incurs liabilities arising from contracts with TFOMI and MI in accordance with Russian legislation and terms and conditions stipulated by those contracts. The Group does not assume any insurance risk under OMI program. The Group receives commission for these services. This commission is recognised in profit or loss within other operating income in the period which it refers to and increases TFOMI receivables. Due to uncertainty about the final amount the commission is recognised not earlier than in the moment of receiving supporting documents from TFOMI.

The Group receives cash from TFOMI and makes payments to MI for the services provided by them within the territorial OMI program. Funds intended for payment for medical services and received by the Group from TFOMI are treated as special purpose funding. The above mentioned special purpose funding directed to MI as advance payments is recognised as an increase in MI receivables. An offset of advances earlier paid to MI in the amounts of invoice registers accepted from MI and invoices for medical services payment, with consideration of medical review of medical and economic control, medical and economic expert examination, expert examination of the quality of medical services under such invoices, is recognised as a decrease in MI receivables.

If the amount due under MI invoices exceeds the amount of available special purpose funds, the Group recognises a deficit of special purpose funding from TFOMI, which is recognised as an increase in TFOMI receivables. After initial recognition receivables are decreased by cash flows from TFOMI. The balance of the special purpose funds after settlements for medical services provided to the insured is returned to the source of funding.

24 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Liabilities to TFOMI at the reporting date are calculated as a sum of liabilities to TFOMI at the beginning of the reporting period and special purpose funds received in the reporting period, reduced by the amount of special purpose funds used in the reporting period for the purpose intended and the amount of special purpose funds returned to the source of funding. These liabilities are non-financial liabilities as they are repaid through an offset of advances that were earlier made to MI. These liabilities are recognised as other liabilities.

Payables to MI under invoices for medical services provided to the insured under OMI is a financial liability of the Group because it results in outflow of funds received under the special purpose funding and is recognised as other financial liabilities.

MI receivables under violations found out by means of expert examinations of the scope, terms, quality and conditions of medical services provided are recognised at the date of expert examination act approval by the medical institution. MI penalty receivables for medical neglect, untimely or inappropriate medical care are recognised in the amount expected to be paid under the act if the amount can be deducted from MI payments or received on the current account of the Group within the same month. Otherwise, payables to TFOMI are recognised instead of increase in the fund for medical services payment. As MI liabilities are repaid to the Group, payables to TFOMI are transferred to the fund for medical services payment.

The Group controls the scope, timing, quality and conditions of medical services provided under OMI by conducting medical and economic control, medical and economic expert examination and expert examination of the quality of medical services and uses the results to bring sanctions against MI for the violations identified. Conduction of such expert examinations is an absolute obligation of the Group. A failure to perform this obligation may result in penalties imposed by TFOMI against the Group. The income of insurance medical institutions related to the funds received from MI as a result of sanctions for the violations identified in the course of control of the scope, timing, quality and conditions of medical services provided is calculated as a certain percentage of the amount of corresponding sanctions. Accordingly, the moment of revenue recognition from sanctions for the violations identified in the course of medical and economic control and medical and economic expert examination is the moment when the amount of penalties is determined and agreed between the insurance medical institution and MI. The moment of revenue recognition from penalties for medical neglect, untimely or inappropriate medical care is the moment when the amount of penalties is deducted from MI payments or received on the current account of the Group. The Group uses a portion of these penalties to form its own funds recognised in profit or loss within other operating income.

The Group receives income due from TFOMI arising from saving funds as compared to the estimated annual amount of funding for insurance medical institution (hereinafter – “amount of special purpose funding saved”). The amount of special purpose funding saved due to insurance medical institution is calculated upon the end of the year as the excess of monthly funding calculated as the number of the insured multiplied by the differentiated norm per person over the amount of special purpose funding actually used by the insurance medical institution for medical services payment, including means received from the normal insurance reserve of the territorial fund. Even when the above amounts can be determined by the insurance medical institution itself the revenue is recognised only after receiving TFOMI approval.

The income in the form of funds for administration, which is calculated as a percentage of the amount of funding for a reporting period is not recognised until two amounts determining the amount of this funding become known: the differentiated norm per person and the number of the insured.

The income due from legal entities or individuals who have caused damage to health of the insured persons in excess of the amounts spent for payment for medical services is recognised when it can be measured, i. e. when in case of such excess the exact amount spent for payment for medical services becomes known.

Income tax. Income tax has been provided for in the consolidated financial statements in accordance with Russian and Serbian tax rates and legislation enacted or substantively enacted at the end of the reporting period.

Income tax charge comprises current tax and deferred tax and is recognised in profit or loss unless it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity.

25 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Current tax is the amount expected to be paid to or recovered from taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if the consolidated financial statements are authorised prior to filing relevant tax declarations. Taxes other than income tax are recognised within administrative and other operating expenses.

Deferred income tax is calculated using the balance sheet liability method for tax losses carried forward and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts according to the consolidated financial statements. Deferred income tax is not recognised for temporary differences arising from initial recognition of asset or liability in a transaction other than business combination if the transaction, when initially recognised, affects neither accounting nor taxable profit. Deferred income tax liabilities are not recognised for temporary differences arising from initial recognition of goodwill and subsequently for goodwill that is not deductible for tax purposes.

Deferred income tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period and that are expected to apply to the period when temporary differences will reverse or tax losses carried forward will be utilised. Deferred income tax assets and liabilities are offset only within the individual companies of the Group.

Deferred income tax assets for deductible temporary differences and tax losses carried forward are recognised only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Deferred income tax is not recognised on post acquisition retained earnings and other post acquisition movements in reserves of subsidiaries where the Group controls the subsidiary’s dividend policy, and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future.

Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are recognised in the concolidated financial statements when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the obligation amount can be made.

Share capital. Ordinary shares are classified as share capital. Incremental costs directly attributable to the issue of new shares, except where companies are merged, are shown in equity as a deduction from the proceeds.

Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity.

Treasury shares. When the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly attributable incremental external costs, net of income taxes, is deducted from equity attributable to shareholders of the Company until the equity instruments are reissued, disposed of or cancelled. Where such shares are subsequently disposed of or reissued, any excess of the consideration received over the initial cost is recognised as share premium.

Dividends. Dividends are recognised in equity in the period when they are declared. Any dividends declared after the end of the reporting period and before the consolidated financial statements are authorised for issue, are disclosed in the subsequent events note. Financial statements of the Company in accordance with Russian accounting regulations are the basis for profit distribution and other appropriations.

Interest and other income and expenses. Interest income and expenses are recognised in profit or loss for all debt instruments on the accrual basis using the effective interest method. This method defers, as part of interest income or expenses, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Revenue from medical services provided is recognised in the reporting period when these services were rendered based on the degree of completeness of the transaction assessed on the basis of the actual service rendered as a proportion of the total services to be provided under the contract.

26 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Revenue from provision of medical services is recognised net of VAT and discounts. The revenue amount is measured at fair value of the consideration received or due to be received.

Administrative, operating and other expenses are recognised on the accrual basis when the product is received or the service is provided.

Staff costs and related contributions. Wages, salaries, contributions to state pension and social insurance funds, paid annual leaves, sick leaves, bonuses and non-monetary benefits are accrued in the period when the associated services are rendered by the employees of the Group within administrative and other operating expenses.

Foreign currency translation. The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment where the entity operates.

The functional currency of the Company and its main subsidiaries, and the consolidated financial statements presentation currency, is the national currency of the Russian Federation, Russian rouble. The Group also includes entities with euro and Serbian dinar as functional currencies.

Monetary assets and liabilities are translated into each Group entity’s functional currency at the official exchange rate of the Central bank of the Russian Federation at the end of the respective reporting period. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into each Group entity’s functional currency at period-end official exchange rates of the Central bank of the Russian Federation are recognised in profit or loss as foreign exchange translation gains less losses. Translation at period-end rates does not apply to non-monetary items that are measured at historical cost.

Non-monetary items measured at fair value in a foreign currency, including equity instruments, are translated using the exchange rates at the date when the fair value was determined.

Effects of exchange rate fluctuations on non-monetary items measured at fair value in a foreign currency are recognised as part of the fair value gains or losses.

The results and financial position of each Group entity are translated into the presentation currency of the consolidated financial statements as follows:

 Assets and liabilities for each statement of financial position presented are translated at the closing rate of the respective reporting period;  Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at dates of transactions);  Components of equity are translated at the historic rates;  All resulting exchange differences are recognised in other comprehensive income.

When control over a foreign company is lost, previously recognised exchange differences on translation to a different presentation currency are reclassified from other comprehensive income to profit or loss as part of gain or loss on disposal. On partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign company are treated as assets and liabilities of the foreign company and are translated at the closing rate.

At 31 December 2018 the principal rates of exchange used for translating foreign currency balances were USD 1 = RR 69,4706 (31 December 2017: USD 1 = RR 57,6002) and EUR 1 = RR 79,4605 (31 December 2017: EUR 1 = RR 68,8668).

27 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

Offsetting. Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to make an offset, or to realise the asset and settle the liability simultaneously. Such a right of offset 1) must not be contingent on a future event and 2) must be legally enforceable in all of the following circumstances: (a) in the normal course of business, (b) in the event of default and (c) in the event of insolvency or bankruptcy.

Presentation of statement of financial position lines in order of liquidity. The Group does not have a clearly identifiable operating cycle and therefore does not present current and non-current assets and liabilities separately in the consolidated statement of financial position. Instead, assets and liabilities are presented in the order of their liquidity.

The following table provides information of amounts at 31 December 2018 expected to be recovered or settled within or more than 12 months after the end of the reporting period:

Amounts expected to be recovered or settled Within 12 months More than 12 months after the end of the after the end of the In millions of Russian roubles reporting period reporting period

ASSETS Cash and cash equivalents 7 184 - Deposits with banks 195 122 11 670 Financial assets at fair value through profit or loss 3 312 31 537 Financial assets available for sale 20 168 46 813 Investments in associates - 28 707 Receivables 35 101 7 637 Prepayments 51 826 - Current income tax prepayment 4 473 - Reinsurers’ share of insurance provisions 31 187 13 282 Investment property - 2 306 Deferred acquisition costs 20 807 34 435 Financial assets held to maturity 2 723 72 040 Premises and equipment - 13 547 Intangible assets 15 990 31 138 Deferred income tax asset - 1 948 Goodwill - 311 Other assets 402 32 Assets held for sale and assets of a disposal group held for sale 3 566 -

TOTAL ASSETS 391 861 295 403

LIABILITIES Insurance provisions 263 099 138 003 Deferred commission income 2 140 - Payables 47 765 2 736 Current income tax liability 56 - Deferred income tax liability - 33 703 Other financial liabilities 2 889 1 081 Other liabilities 43 939 -

TOTAL LIABILITIES 359 888 175 523

28 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

3 Summary of Significant Accounting Policies (continued)

The following table provides information of amounts at 31 December 2017 expected to be recovered or settled within or more than 12 months after the end of the reporting period:

Amounts expected to be recovered or settled Within 12 months More than 12 months after the end of the after the end of the In millions of Russian roubles reporting period reporting period

ASSETS Cash and cash equivalents 5 631 - Deposits with banks 113 707 10 358 Financial assets at fair value through profit or loss 2 074 14 260 Financial assets available for sale 7 361 52 448 Investments in associates - 9 126 Receivables 29 842 6 250 Prepayments 16 272 - Current income tax prepayment 1 035 - Reinsurers’ share of insurance provisions 21 235 34 237 Investment property - 1 386 Deferred acquisition costs 2 407 808 Financial assets held to maturity 1 011 11 085 Premises and equipment - 13 907 Intangible assets - 248 Deferred income tax asset - 218 Other assets 205 13 Assets held for sale and assets of a disposal group held for sale 289 -

TOTAL ASSETS 201 069 154 344

LIABILITIES Insurance provisions 109 849 81 044 Deferred commission income 2 112 - Payables 26 831 2 368 Current income tax liability 14 - Deferred income tax liability - 5 321 Other financial liabilities 1 841 3 Other liabilities 16 453 -

TOTAL LIABILITIES 157 100 88 736

4 Critical Accounting Estimates and Judgements in Applying Accounting Policies

The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next reporting period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Management also makes certain judgements in the process of applying the accounting policies. Professional judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause significant adjustments to carrying amounts of assets and liabilities within the next financial period include:

Estimation of liabilities under insurance contracts. Refer to Note 19.

29 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

4 Critical Accounting Estimates and Judgements in Applying Accounting Policies (continued)

Financial assets held to maturity. Management applies judgement in assessing whether financial assets can be categorised as held to maturity in order to (a) confirm its intention and ability to hold these assets to maturity and (b) to determine whether securities are quoted in an active market.

If the Group fails to keep these financial assets to maturity, the whole category will be reclassified to financial assets available for sale. Accordingly, these financial assets will be measured at fair value rather than amortised cost.

If the whole category of financial assets held to maturity is subject to reclassification to financial assets available for sale, their carrying amount will increase by RR 799 million (31 December 2017: RR 584 million).

Impairment of receivables and prepayments. The Group regularly reviews its receivables and prepayments to assess impairment. In determining whether an impairment loss should be recognised in profit or loss, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of assets before the decrease can be identified with an individual asset in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of debtors in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those assets in the portfolio when scheduling its future cash flows.

The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss experience compared to the loss estimates used would result in an increase or decrease in impairment losses of RR 245 million (31 December 2017: RR 221 million).

Tax legislation. Russian tax legislation is subject to varying interpretations (Note 33).

5 Adoption of New or Revised Standards and Interpretations

The following amended standards became effective for the Group since 1 January 2018 and had no impact on the consolidated financial statements:  Amendments to IFRS 2 Share-based Payment (issued at 20 June 2016 and effective for annual periods beginning at or after 1 January 2018);  Amendments to IAS 40 Investment Property – Transfers of Investment Property (issued at 8 December 2016 and effective for annual periods beginning at or after 1 January 2018);  IFRS 15 Revenue from Contracts with Customers (issued at 28 May 2014 and effective for annual periods beginning at or after 1 January 2018);  Amendments to IFRS 15 Revenue from Contracts with Customers (issued at 12 April 2014 and effective for annual periods beginning at or after 1 January 2018);  Amendments to IFRS 1 First-time Adoption of IFRS, IAS 28 Investments in Associates and Joint Ventures and IFRS 4 Application of IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts included in the Annual improvements to IFRS 2014-2016 cycle (issued at 8 December 2016 and effective for annual periods beginning at or after 1 January 2018);  IFRIC 22 Foreign Currency Transactions and Advance Consideration (issued at 8 December 2016 and effective for annual periods beginning at or after 1 January 2018).

30 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

6 New Accounting Pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning at or after 1 January 2019, and which the Group has not early adopted:

IFRS 16 Leases (issued at 13 January 2016 and effective for annual periods beginning at or after 1 January 2019). IFRS 16 Leases was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 Leases sets out the principles for recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17 Leases. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets and short- term leases. At the commencement date of a lease, a lessee will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right- of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events, including a change in the lease term and a change in future lease payments resulting from a change in an index or rate used to determine those payments. The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

Lessor accounting under IFRS 16 Leases is substantially unchanged from current accounting treatment under IAS 17 Leases. Lessors will continue to classify all leases using the same classification principle as in IAS 17 Leases and distinguish between two types of leases: operating and finance leases.

IFRS 16 Leases, which is effective for annual periods beginning at or after 1 January 2019, requires lessees and lessors to make more extensive disclosures than under IAS 17 Leases.

The Group plans to adopt IFRS 16 Leases retrospectively and to recognise the cumulative effect of initially applying IFRS 16 Leases at the date of initial application in accordance with paragraph C5(b) of the standard. The Group will apply the standard to contracts that were previously identified as leases in accordance with IAS 17 Leases and IFRIC 4 Determining whether an Arrangement Contains a Lease. The Group will therefore not apply the standard to contracts that were not previously identified as containing a lease in accordance with IAS 17 Leases and IFRIC 4 Determining whether an Arrangement Contains a Lease.

The Group will use the exemptions proposed by the standard for lease contracts where the lease terms end within 12 months as of the date of initial application, and lease contracts with the underlying asset of low value.

Preliminary estimated effect of adoption of IFRS 16 Leases on the consolidated statement of financial position is as follows:

RR million 1 January 2019

Prepayments (14) Asset in the form of right to use 4 229

Total assets 4 215

Operating lease commitments 4 215

Total liabilities 4 215

IFRS 17 Insurance Contracts (issued at 18 May 2017 and effective for annual periods beginning at or after 1 January 2022). IFRS 17 Insurance Contracts covers recognition and measurement, presentation and disclosure of insurance contracts. Once effective, IFRS 17 Insurance Contracts will replace IFRS 4 Insurance Contracts that was issued in 2005. IFRS 17 Insurance Contracts applies to all types of insurance contracts, regardless of the type of entities that issue them, as well as to certain financial guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply.

31 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

6 New Accounting Pronouncements (continued)

The overall objective of IFRS 17 Insurance Contracts is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements of IFRS 4 Insurance Contracts, IFRS 17 Insurance Contracts provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of IFRS 17 Insurance Contracts is the general model, supplemented by:

 A specific adaptation for contracts with direct participation features (the variable fee approach);  A simplified approach (the premium allocation approach) mainly for short-duration contracts.

IFRS 17 Insurance Contracts is effective for reporting periods beginning at or after 1 January 2022, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers at the date it first applies IFRS 17 Insurance Contracts. The Group is currently assessing the impact of the standard on its consolidated financial statements.

IFRS 9 Financial Instruments (amended in July 2014 and effective for annual periods beginning at or after 1 January 2018). In accordance with new standard financial assets should be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income and those to be measured subsequently at fair value through profit or loss.

Classification of debt instruments is driven by the entity’s business model for managing the financial assets and by the structure of contractual cash flows, whether they represent solely payments of principal and interest or not. If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the requirement of solely payments of principal and interest. Debt instruments that meet the solely payments of principal and interest requirement that are held in a portfolio where an entity both holds assets to collect assets’ cash flows and sells assets may be classified as financial assets at fair value through other comprehensive income. Financial assets that do not contain cash flows that are solely payments of principal and interest must be measured at fair value through profit or loss. Embedded derivatives are no longer separated from financial assets but will be included in assessing the solely payments of principal and interest condition.

Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss.

Most of the requirements from IAS 39 Financial Instruments: Recognition and Measurement for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9 Financial Instruments. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

IFRS 9 Financial Instruments introduces a new model for the recognition of impairment losses – the expected credit losses model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition.

In practice the new rules mean that entities will have to recognise an immediate loss equal to the 12-month expected credit losses on initial recognition of financial assets that are not credit impaired (or lifetime expected credit losses for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime expected credit losses rather than 12-month expected credit losses. The model includes operational simplifications for lease and trade receivables.

Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 Financial Instruments and continuing to apply IAS 39 Financial Instruments: Recognition and Measurement to all hedges because the standard currently does not address accounting for macro hedging.

The new standard introduces the requirements for disclosure of additional information and changes in presentation of data. The nature and volume of information on financial instruments disclosed by the Group is expected to be changed, especially in the year of adoption of the standard.

32 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

6 New Accounting Pronouncements (continued)

The Group has used the temporary exemption from IFRS 9 Financial Instruments in accordance with Amendments to IFRS 4 Insurance Contracts effective from 1 January 2018 and is currently assessing the impact of the standard on its consolidated financial statements.

IFRIC 23 Uncertainty over Income Tax Treatment (issued at 7 June 2017 and effective for annual periods beginning at or after 1 January 2019). The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. The interpretation specifically addresses the following:

- Whether an entity considers uncertain tax treatments separately; - The assumptions an entity makes about the examination of tax treatments by taxation authorities; - How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; - How an entity considers changes in facts and circumstances.

The interpretation neither applies to taxes or levies outside the scope of IAS 12 Income Taxes, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Group is currently assessing the impact of the interpretation on its consolidated financial statements.

The following other new pronouncements are not expected to have any material impact on the Group’s consolidated financial statements when adopted:

- Amendments to IFRS 9 Prepayment Features with Negative Compensation (issued at 27 March 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IAS 19 Plan Amendment, Curtailment or Settlement (issued at 7 February 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (issued at 27 March 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IFRS 3 Business Combinations (issued at 30 October 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IFRS 11 Joint Arrangements (issued at 27 March 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IAS 12 Income Taxes (issued at 27 March 2018 and effective for annual periods beginning at or after 1 January 2019); - Amendments to IAS 23 Borrowing Costs (issued at 27 March 2018 and effective for annual periods beginning at or after 1 January 2019).

7 Cash and Cash Equivalents

RR million 31 December 2018 31 December 2017

Cash on current accounts 5 860 5 478 Deposits on demand and overnight placements with credit organisations and foreign banks 912 9 Cash in trust management 349 57 Cash in transit 14 6 Cash on hand 10 10 Other cash equivalents 39 71

Total cash and cash equivalents 7 184 5 631

33 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

7 Cash and Cash Equivalents (continued)

At 31 December 2018 cash and cash equivalents include RR 6 850 million (31 December 2017: RR 5 455 million) placed with three (31 December 2017: three) Russian banks.

Fair value of cash and cash equivalents equals the carrying value.

8 Deposits with Banks

RR million 31 December 2018 31 December 2017

Deposits with credit organisations and foreign banks 178 745 112 943 Cash on minimum balance accounts with original maturities of more than one banking day 23 062 6 136 Subordinated deposits 5 000 5 000 Less provision for impairment (15) (14)

Total deposits with banks 206 792 124 065

At 31 December 2018 deposits with banks include RR 165 120 million (31 December 2017: RR 104 524 million) placed with four (31 December 2017: four) Russian banks.

At 31 December 2018 and 31 December 2017 the subordinated deposit is placed with a Russian bank under the following conditions: the bank can suspend the payment of principal and interest in case as a result of such payment grounds for implementation of bank bankruptcy prevention measures emerge.

The table below presents information about contractual interest rates and maturity dates for deposits with banks:

31 December 2018 31 December 2017

Contractual Contractual interest rates Maturity interest rates Maturity

Deposits with credit organisations and foreign banks 1,30 - 10,50 2018 - 2031 0,45 - 10,50 2018 - 2022 Cash on minimum balance accounts with original maturities of more than one banking day 0,38 - 10,05 2019 1,30 - 7,00 2018 Subordinated deposits 9,25 2022 10,50 2022

9 Financial Assets at Fair Value through Profit or Loss

RR million 31 December 2018 31 December 2017

Financial assets held for trading 31 245 11 217 Financial assets initially designated at fair value through profit or loss 3 604 5 117

Total financial assets at fair value through profit or loss 34 849 16 334

34 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

9 Financial Assets at Fair Value through Profit or Loss (continued)

Financial assets held for trading:

RR million 31 December 2018 31 December 2017

Equity securities of non-financial organisations 919 580 Equity securities of credit organisations and foreign banks 179 124 Equity securities of non-credit financial organisations 14 30

Total equity securities 1 112 734

Debt securities of non-financial organisations 13 828 3 543 Debt securities of non-credit financial organisations 3 515 2 360 Debt securities of credit organisations and foreign banks 3 356 1 660 Debt securities of the Russian Federation government 2 827 153 Debt securities of municipal organisations 1 599 1 312 Debt securities of foreign states 610 -

Total debt securities 25 735 9 028

Derivative financial instruments 4 398 1 455

Total financial assets held for trading 31 245 11 217

Financial assets initially designated at fair value through profit or loss:

RR million 31 December 2018 31 December 2017

Equity securities of non-financial organisations 311 265

Total equity securities 311 265

Debt securities of non-credit financial organisations 1 167 1 511 Debt securities of non-financial organisations 727 1 220 Debt securities of credit organisations and foreign banks 707 1 157 Debt securities of the Russian Federation government 621 824 Debt securities of municipal organisations 71 140

Total debt securities 3 293 4 852

Total financial assets initially designated at fair value through profit or loss 3 604 5 117

At 31 December 2018 and 31 December 2017 debt securities at fair value through profit or loss are not collateralised and are not impaired.

Interest rates and maturity of debt securities at fair value through profit or loss are as follows:

31 December 2018 31 December 2017 Yield to Yield to maturity (%) Maturity maturity (%) Maturity

Debt securities of non-financial organisations 4,20 - 10,25 2019 - 2052 6,04 - 10,58 2018 - 2052 Debt securities of non-credit financial organisations 7,13 - 11,00 2019 - 2050 3,99 - 8,29 2018 - 2037 Debt securities of credit organisations and foreign banks 6,88 - 12,40 2020 - 2032 6,47 - 8,42 2019 - 2026 Debt securities of the Russian Federation government 6,80 - 8,73 2019 - 2033 2,70 - 7,54 2018 - 2033 Debt securities of municipal organisations 5,67 - 12,43 2019 - 2026 3,73 - 8,23 2019 - 2023 Debt securities of foreign states 4,15 - 8,63 2019 - 2022 - -

35 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

10 Financial Assets Available for Sale

RR million 31 December 2018 31 December 2017

Equity securities of credit organisations and foreign banks 2 - Equity securities of non-credit financial organisations 2 - Equity securities of non-financial organisations 1 3

Total equity securities 5 3

Debt securities of the Russian Federation government 19 717 2 051 Debt securities of non-financial organisations 18 883 18 429 Debt securities of credit organisations and foreign banks 14 153 24 359 Debt securities of non-credit financial organisations 13 983 15 175 Debt securities of municipal organisations 517 68

Total debt securities 67 253 60 082

Total financial assets available for sale before provision for impairment 67 258 60 085

Provision for impairment (277) (276)

Total financial assets available for sale 66 981 59 809

At 31 December 2018 the Group recognised the impairment loss for debt securities of credit organisations and foreign banks in the amount of RR 277 million (31 December 2017: for debt securities of credit organisations and foreign banks in the amount of RR 275 million and for debt securities of non-financial organisations in the amount of RR 1 million).

Interest rates and maturity of debt securities available for sale are as follows:

31 December 2018 31 December 2017 Yield to Yield to maturity (%) Maturity maturity (%) Maturity

Debt securities of the Russian Federation government 3,04 - 8,52 2019 - 2047 5,75 - 6,21 2018 Debt securities of non-financial organisations 3,31 - 12,12 2019 - 2046 6,62 - 10,88 2018 - 2049 Debt securities of credit organisations and foreign banks 7,09 - 9,09 2019 - 2027 6,47 - 9,92 2018 - 2026 Debt securities of non-credit financial organisations 7,11 - 22,05 2019 - 2049 7,14 - 8,30 2018 - 2032 Debt securities of municipal organisations 6,10 - 9,23 2019 - 2026 7,65 2023

36 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

11 Investments in Associates

The carrying value of investments in associates is allocated by investment as follows:

RR million 31 December 2018 31 December 2017

GAZFOND Group 21 901 - NMG Group 6 806 5 647 Tele 2 - 3 479 SOVAG - -

Total investments in associates 28 707 9 126

At 24 December 2018 Non-state pension fund NPF GAZFOND has changed its legal form to joint stock company. As a result the Group obtained 33,33% of JSC NPF GAZFOND shares. GAZFOND Group consists of JSC NPF GAZFOND, its subsidiaries and associates, including ZPIF New Gorizonts, ZPIF Strategic assets, ZPIF Electron and others.

The shares were distributed among stakeholders that had previously made contribution to JSC NPF GAZFOND. The Group recognised income in the amount of the Group`s share in provisional fair value of identified net assets of JSC NPF GAZFOND excess over the amount of contributions previously made to JSC NPF GAZFOND.

The provisional fair value of net assets of GAZFOND Group at 24 December 2018 is as follows:

RR million Fair value at the acquisition date

Cash and cash equivalents 23 371 Financial assets at fair value through profit or loss 309 461 Financial assets at amortised cost 96 183 Deposits with banks 13 015 Loans 55 159 Investments in associates 14 822 Investment property 13 555 Receivables 460 Deferred income tax asset 209 Other assets 1 186 Pension liabilities (354 825) Deferred income tax liability (558) Other financial liabilities (1 431) Other liabilities (612)

Net assets of associate 169 995

Less: net assets attributable to non-controlling interest (54 320) Less: reserves for pension liabilities not attributable to the shareholders (49 968)

Total net assets of associate attributable to the shareholders 65 707

NMG Group represents CJSC National Media Group, its subsidiaries and associates, including REN-TV Group, Saint Petersburg TV Broadcasting Company, JSC Channel One, Izvestiya newspaper and other assets.

Tele 2 (Netherlands) B.V. (hereinafter – “Tele 2”) is a holding company for a group of companies which provides telecommunication services in the Russian Federation. Tele 2 was registered in the Netherlands, with principal activity carried out in the Russian Federation. The Group has significant influence over Tele 2 and its subsidiaries in accordance with Tele 2 shareholders’ agreements.

37 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

11 Investments in Associates (continued)

At 31 December 2018 the carrying value of investment in Tele 2 in the amount of RR 3 497 million is recognised within assets held for sale and assets of a disposal group held for sale due to the intention to realise it during 12 months.

SOVAG is registered in Germany and operates in accordance with German legislation. At 31 December 2018 and 31 December 2017 the Group recognised impairment of investment in this associate.

The table below summarises movements in the carrying amount of the Group’s investments in associates.

RR million 2018 2017

Carrying amount at 1 January 9 126 8 749

Share in profit of associates 23 078 62 Reclassification to assets held for sale (3 497) - Recovery of provision for impairment of investments in associates - 294 Share in other comprehensive income of associates (Note 22) - 21

Carrying amount at 31 December 28 707 9 126

The Group’s share in associates is as follows:

31 December 2018 31 December 2017 Country of Country of % of interest held incorporation % of interest held incorporation

The Russian GAZFOND Group 33,33 Federation - - The Russian The Russian NMG Group * Federation * Federation Tele 2 5,00 The Netherlands 5,00 The Netherlands SOVAG 25,10 Germany 25,10 Germany

* At 31 December 2018 and 31 December 2017 investments in NMG Group represent 21,22% interest in CJSC NMG, 18% interest in LLC Akcept (REN TV channel) and 3,00% share in JSC Saint Petersburg TV Broadcasting Company.

12 Receivables

RR million 31 December 2018 31 December 2017

Receivables arising from non-life insurance operations 42 025 34 845 OMI receivables 1 804 1 470 Receivables arising from life insurance operations 173 11 Other receivables 1 176 1 972 Less provision for impairment (2 440) (2 206)

Total receivables 42 738 36 092

38 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

12 Receivables (continued)

Receivables arising from non-life insurance operations:

RR million 31 December 2018 31 December 2017

Receivables of the insured under direct insurance contracts 26 956 25 859 Settlements with agents and brokers 7 941 2 256 Receivables arising from assumed reinsurance contracts 2 071 2 575 Receivables of coinsured 1 595 1 642 Unaccomplished settlements arising from insurance and reinsurance operations 987 653 Settlements under depo premiums and claims 943 831 Receivables arising from subrogation and recourses 622 563 Receivables arising from ceded reinsurance contracts 419 189 Receivables arising from direct claims settlement transactions 387 247 Receivables of coinsurers 104 30

Total receivables arising from non-life insurance operations before provision for impairment 42 025 34 845

Provision for impairment (2 089) (1 909)

Total receivables arising from non-life insurance operations 39 936 32 936

At 31 December 2018 34% of receivables arising from non-life insurance operations relate to 10 largest counterparties (31 December 2017: 40%).

OMI receivables:

RR million 31 December 2018 31 December 2017

Settlements with TFOMI 1 359 1 363 Settlements with medical organisations 434 107 Settlements under recourses 11 -

Total OMI receivables before provision for impairment 1 804 1 470

Provision for impairment (8) -

Total OMI receivables 1 796 1 470

39 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

12 Receivables (continued)

Movements in provision for impairment of receivables are as follows:

2018

Provision for impairment Provision for Provision for impairment of Provision for of receivables arising impairment of Total provision receivables arising from non- impairment of OMI from life insurance other for impairment RR million life insurance operations receivables operations receivables of receivables

Provision for impairment of receivables at 1 January 1 909 - - 297 2 206

Creation of provision for impairment of receivables during the year 594 12 1 101 708 Recovery of provision for impairment of receivables during the year (282) (4) - (4) (290) Receivables written-off as uncollectible during the year (132) - - (52) (184)

Provision for impairment of receivables at 31 December 2 089 8 1 342 2 440

2017

Provision for impairment Provision for Provision for impairment of Provision for of receivables arising impairment of Total provision receivables arising from non- impairment of OMI from life insurance other for impairment RR million life insurance operations receivables operations receivables of receivables

Provision for impairment of receivables at 1 January 1 606 - 4 700 2 310

Creation of provision for impairment of receivables during the year 453 - - 4 457 Recovery of provision for impairment of receivables during the year (99) - (4) (379) (482) Receivables written-off as uncollectible during the year (51) - - (28) (79)

Provision for impairment of receivables at 31 December 1 909 - - 297 2 206

40 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

13 Prepayments

RR million 31 December 2018 31 December 2017

Prepayments for tendering 599 446

Total financial prepayments 599 446

Prepayments for OMI operations 39 308 14 332 Prepayments for insurance contracts 6 961 - Settlements with suppliers and contractors 2 715 635 Settlements with assistance and medical companies and service stations 975 485 Prepayments for software 135 24 Prepaid taxes other than income tax 60 54 Other prepayments 1 081 296

Total non-financial prepayments 51 235 15 826

Provision for impairment (8) -

Total prepayments 51 826 16 272

By the date of issue of these consolidated financial statements prepayments for tendering have been returned to the Group due to finalisation of tenders.

14 Investment Property

RR million 2018 2017

Carrying value at 1 January 1 386 1 277

Acquisition of subsidiary (Note 37) 819 - Additions 193 108 Revaluation (92) 22 Transfers to other categories during the year - (11) Disposals - (10)

Carrying value at 31 December 2 306 1 386

At 31 December 2018 and 31 December 2017 investment property was not pledged to the third parties as collateral.

41 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

15 Financial Assets Held to Maturity

RR million 31 December 2018 31 December 2017

Debt securities of the Russian Federation government 28 772 2 734 Debt securities of non-financial organisations 17 525 994 Debt securities of non-credit financial organisations 17 521 3 144 Debt securities of credit organisations and foreign banks 7 658 1 976 Debt securities of municipal organisations 2 967 2 972 Debt securities of foreign states 320 276

Total financial assets held to maturity 74 763 12 096

Interest rates and maturity of debt securities are as follows:

31 December 2018 31 December 2017 Yield to maturity Yield to maturity (%) Maturity (%) Maturity

Debt securities of the Russian Federation government 3,62 - 8,75 2019 - 2033 6,87 - 7,77 2021 - 2033 Debt securities of non-financial organisations 2,83 - 12,70 2019 - 2034 7,49 - 9,94 2020 - 2032 Debt securities of non-credit financial organisations 2,11 - 10,90 2019 - 2057 2,21 - 9,25 2018 - 2037 Debt securities of credit organisations and foreign banks 7,20 - 14,25 2020 - 2033 7,00 - 9,09 2020 - 2026 Debt securities of municipal organisations 7,50 - 9,65 2022 - 2025 7,61 - 8,32 2022 - 2025 Debt securities of foreign states 1,95 - 5,37 2019 - 2028 2,35 - 5,37 2018 - 2026

42 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

16 Premises and Equipment

Land Office and Construc- and computer Other tion in RR million premises equipment Transport equipment progress Total

Carrying amount at 31 December 2016 10 379 158 1 795 426 96 12 854

Cost Balance at the beginning of the year 12 141 828 3 451 1 873 96 18 389 Additions 40 57 2 448 161 37 2 743 Disposals (247) (94) (32) - - (373) Revaluation (Note 22) (461) - - - - (461) Impairment (15) - - - - (15) Translation to presentation currency - - (7) - - (7)

Balance at 31 December 2017 11 458 791 5 860 2 034 133 20 276

Accumulated depreciation Balance at the beginning of the year (1 762) (671) (1 655) (1 447) - (5 535) Depreciation charge (Note 28) (375) (71) (348) (211) - (1 005) Disposals 67 41 30 - - 138 Revaluation (Note 22) 32 - - - - 32 Translation to presentation currency - - 1 - - 1

Balance at 31 December 2017 (2 038) (701) (1 972) (1 658) - (6 369)

Carrying amount at 31 December 2017 9 420 90 3 888 376 133 13 907

Cost Balance at the beginning of the year 11 458 791 5 860 2 034 133 20 276 Additions 63 225 48 175 215 726 Acquisition of subsidiary (Note 37) 97 483 24 - 8 612 Disposals (9) (29) (32) - (240) (310) Revaluation (Note 22) (225) - - - - (225) Impairment (59) - - - - (59) Translation to presentation currency - 1 12 - - 13

Balance at 31 December 2018 11 325 1 471 5 912 2 209 116 21 033

Accumulated depreciation Balance at the beginning of the year (2 038) (701) (1 972) (1 658) - (6 369) Depreciation charge (Note 28) (398) (115) (569) (108) - (1 190) Disposals - 29 24 - - 53 Revaluation (Note 22) 23 - - - - 23 Translation to presentation currency - - (3) - - (3)

Balance at 31 December 2018 (2 413) (787) (2 520) (1 766) - (7 486)

Carrying amount at 31 December 2018 8 912 684 3 392 443 116 13 547

43 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

16 Premises and Equipment (continued)

The table below reconciles the carrying value of premises recognised at revalued amounts in the consolidated financial statements to the value of these assets had they been recognised at cost less accumulated depreciation:

RR million 31 December 2018 31 December 2017

Carrying amount of premises 8 912 9 420 Revaluation reserve for premises less deferred income tax on revaluation reserve for premises (1 009) (1 177) Deferred income tax on revaluation reserve for premises (253) (299) Premises at cost less accumulated depreciation 7 650 7 944

Management believes there were no indicators of impairment of premises and equipment during the years ended 31 December 2018 and 31 December 2017.

17 Intangible Assets

Intangible assets Computer identified in Other software business intangible RR million licences combinations assets Total

Carrying amount at 31 December 2016 93 - - 93

Cost Balance at the beginning of the year 176 - 41 217 Additions 248 - - 248 Disposals (20) - (38) (58) Translation to presentation currency 1 - - 1

Balance at 31 December 2017 405 - 3 408

Accumulated amortisation Balance at the beginning of the year (83) - (41) (124) Amortisation charge (Note 28) (78) - - (78) Disposals 4 - 38 42

Balance at 31 December 2017 (157) - (3) (160)

Carrying amount at 31 December 2017 248 - - 248

Cost Balance at the beginning of the year 405 - 3 408 Acquisition of subsidiary (Note 37) 651 51 101 442 52 194 Additions 729 - 24 753 Disposals (13) - (1) (14)

Balance at 31 December 2018 1 772 51 101 468 53 341

Accumulated amortisation Balance at the beginning of the year (157) - (3) (160) Amortisation charge of PVIF asset (Note 26) - (5 352) - (5 352) Amortisation charge of other intangible assets (Note 28) (111) (574) (16) (701)

Balance at 31 December 2018 (268) (5 926) (19) (6 213)

Carrying amount at 31 December 2018 1 504 45 175 449 47 128

44 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions

31 December 2018 31 December 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

Provision for life insurance contracts 102 709 (101) 102 608 23 052 (1) 23 051 Provision for non-life insurance contracts 298 393 (44 368) 254 025 167 841 (55 471) 112 370

Total insurance provisions 401 102 (44 469) 356 633 190 893 (55 472) 135 421

a) Provisions for life insurance contracts:

31 December 2018 31 December 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

Mathematical provision 95 976 (34) 95 942 21 347 (1) 21 346 Provision for options and guarantees 2 561 - 2 561 445 - 445 OCP and IBNR 2 153 (67) 2 086 302 - 302 Provision for expenses on servicing insurance obligations 991 - 991 100 - 100 Provision for additional payments (insurance bonuses) 734 - 734 846 - 846 Equalisation provision 294 - 294 12 - 12

Total provision for life insurance contracts 102 709 (101) 102 608 23 052 (1) 23 051

Movements of mathematical provision, provision for expenses on servicing insurance obligations and equalisation provision are presented with the breakdown to the main components, specifically: changes in actuarial current value of claims and actuarial current value of reserved net premiums. Each component is calculated as a value at the end of the reporting period, less value at the beginning of the period and values at the beginning of the inception of liability under the new contracts signed in the period. Additionally, the aggregate change in liabilities related to the fluctuations in exchange rates has been assessed.

Movement of mathematical provision is presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 21 347 (1) 21 346 12 990 (1) 12 989 Changes in provision due to reserved net premium 26 429 (21) 26 408 10 833 (4) 10 829 Changes in provision due to claims, terminations or changes in insurance obligations (5 410) 3 (5 407) (2 339) 4 (2 335) Effect of exchange rate fluctuations 881 11 892 (137) - (137) Acquisition of subsidiary (Note 37) 52 729 (26) 52 703 - - -

At 31 December 95 976 (34) 95 942 21 347 (1) 21 346

45 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions (continued)

Movement of provision for options and guarantees is presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 445 - 445 - - - Accrual of additional payments under contracts 580 - 580 - - - Release of provision under expired contracts (17) - (17) - - - Acquisition of subsidiary (Note 37) 1 553 - 1 553 - - - Changes in provision due to changes in actuarial assumptions - - - 445 - 445

At 31 December 2 561 - 2 561 445 - 445

Movements of OCP and IBNR are presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 302 - 302 370 - 370 Losses incurred in the current reporting period 2 425 (14) 2 411 3 426 (1) 3 425 Changes in the amounts of losses incurred in prior reporting periods 3 152 - 3 152 (4) - (4) Claims during the reporting period (4 972) - (4 972) (3 489) 1 (3 488) Effect of exchange rate fluctuations 1 - 1 (1) - (1) Acquisition of subsidiary (Note 37) 1 245 (53) 1 192 - - -

At 31 December 2 153 (67) 2 086 302 - 302

Movement of provision for expenses on servicing insurance obligations is presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 100 - 100 76 - 76 Changes in provision due to reserved net premium 181 - 181 48 - 48 Changes in provision due to claims, terminations or changes in insurance obligations (37) - (37) (23) - (23) Effect of exchange rate fluctuations (6) - (6) (1) - (1) Acquisition of subsidiary (Note 37) 753 - 753 - - -

At 31 December 991 - 991 100 - 100

46 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions (continued)

Movement of provision for additional payments (insurance bonuses) is presented as accrual of additional claims under agreements valid at the beginning of the period and signed in the period, but not including those terminated in the period, less provision released under contracts expired during the period due to occurrence of an insurance event. Additionally, the aggregate change in liabilities related to fluctuations in exchange rates is assessed.

Movement of provision for additional payments (insurance bonuses) is presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 846 - 846 954 - 954 Accrual of additional payments under contracts 167 - 167 241 - 241 Release of provision under expired contracts (405) - (405) (348) - (348) Effect of exchange rate fluctuations - - - (1) - (1) Acquisition of subsidiary (Note 37) 126 - 126 - - -

At 31 December 734 - 734 846 - 846

Movement of equalisation provision is presented below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 12 - 12 8 - 8 Accrual of provision in the reporting period 38 - 38 5 - 5 Usage of provision in the reporting period (10) - (10) (1) - (1) Effect of exchange rate fluctuations (5) - (5) - - - Acquisition of subsidiary (Note 37) 259 - 259 - - -

At 31 December 294 - 294 12 - 12

b) Provisions for non-life insurance contracts:

31 December 2018 Reinsurers’ share of Provisions, net of RR million Gross provision provision reinsurance

OCP and IBNR 84 514 (22 694) 61 820 UPR 210 416 (21 674) 188 742 Provision for claims handling expenses 3 820 - 3 820 Subrogation asset (354) - (354) Actuarial evaluation of future salvage materials realisation (3) - (3)

Total provisions for non-life insurance contracts 298 393 (44 368) 254 025

47 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions (continued)

31 December 2017 Reinsurers’ share of Provisions, net of RR million Gross provision provision reinsurance

OCP and IBNR 88 711 (34 552) 54 159 UPR 76 331 (20 919) 55 412 Provision for claims handling expenses 3 057 - 3 057 Subrogation asset (258) - (258)

Total provisions for non-life insurance contracts 167 841 (55 471) 112 370

Movements of OCP and IBNR are analysed below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 88 711 (34 552) 54 159 70 023 (18 623) 51 400 Losses incurred in the current reporting period 103 544 (6 149) 97 395 103 613 (17 792) 85 821 Changes in amounts of losses incurred in prior reporting periods (9 947) 3 449 (6 498) (5 648) (2 210) (7 858) Claims during the reporting period (117 654) 25 610 (92 044) (79 278) 4 073 (75 205) Other changes (1 944) - (1 944) - - - Acquisition of subsidiary (Note 37) 21 801 (11 048) 10 753 - - - Translation to presentation currency 3 (4) (1) 1 - 1

At 31 December 84 514 (22 694) 61 820 88 711 (34 552) 54 159

The discharge of obligations under assumed reinsurance contracts in accordance with the commutation agreement with SOVAG is recognised in other changes of OCP and IBNR.

Movement of UPR is presented in the table below:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 76 331 (20 919) 55 412 66 830 (16 278) 50 552 Premiums accrued in the reporting period 197 352 (30 039) 167 313 165 277 (32 051) 133 226 Premiums earned in the reporting period (184 111) 31 233 (152 878) (155 805) 27 422 (128 383) Acquisition of subsidiary (Note 37) 120 809 (1 928) 118 881 - - - Translation to presentation currency 35 (21) 14 29 (12) 17

At 31 December 210 416 (21 674) 188 742 76 331 (20 919) 55 412

48 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions (continued)

Movement of provision for claims handling expenses is as follows:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 3 057 - 3 057 2 251 - 2 251 Claims handling expenses incurred in the current reporting period 6 086 - 6 086 3 552 - 3 552 Changes in amounts of claims handling expenses incurred in prior reporting periods (99) - (99) 1 245 - 1 245 Claims handling expenses paid during the reporting period (6 082) - (6 082) (3 991) - (3 991) Acquisition of subsidiary (Note 37) 858 - 858 - - -

At 31 December 3 820 - 3 820 3 057 - 3 057

Movement of subrogation asset is as follows:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January (258) - (258) (556) - (556) Evaluation of income from subrogation and recourses related to losses incurred in the reporting period (478) - (478) (461) - (461) Income from subrogation and recourses received during the reporting period 501 - 501 491 - 491 Change in evaluation of income from subrogation and recourses related to losses incurred in prior reporting periods (67) - (67) (51) - (51) Changes in actuarial assumptions - - - 320 - 320 Acquisition of subsidiary (Note 37) (52) - (52) - - - Translation to presentation currency - - - (1) - (1)

At 31 December (354) - (354) (258) - (258)

49 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

18 Insurance Provisions (continued)

Actuarial evaluation of future salvage materials realisation is as follows:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January ------Evaluation of income from salvage materials realisation related to losses incurred in the reporting period (101) - (101) - - - Income from salvage materials realisation received during the reporting period 101 - 101 - - - Changes in evaluation of income from salvage materials realisation related to losses incurred in prior reporting periods 3 - 3 - - - Acquisition of subsidiary (Note 37) (6) - (6) - - -

At 31 December (3) - (3) - - -

19 Evaluation of Insurance Liabilities

Liabilities under life insurance contracts

The Group calculates provisions under life insurance contracts on the basis of Regulations on Life Insurance Provisions, Νο. 557-P issued by the Central bank of the Russian Federation at 16 November 2016 and:

- LLC IC SOGAZ-Life in accordance with Regulations on Life Insurance Provisions, approved by the Order Νο. 121 of subsidiary dated 15 November 2018 and submitted for approval to insurance supervising authorities in accordance with Russian legislation; - JSC VTB Life Insurance in accordance with Regulations on Life Insurance Provisions, approved by the Order Νο. 05-00.02/116-od of subsidiary dated 25 September 2018 and submitted for approval to insurance supervising authorities in accordance with Russian legislation.

For valuation of insurance contracts liabilities / investments contracts with DPF the prescribed prospective net method of insurance liabilities evaluation is used which is based on accounting for the current value of expected insurance claims / expenses on servicing insurance obligations / deficit of insurance premiums, less the present value of expected insurance premiums.

Calculation of insurance provisions (mathematical provision, provision for expenses on servicing insurance obligations, equalisation provision) is performed on the basis of reserved net premium and provisioning basis, subject to terms and conditions of life insurance contracts. Values of provisioning basis parameters (mortality tables, profitability rates) coincide with values of rates basis, with profitability rates bounded by internal regulation.

For valuation of investment contract liabilities without DPF the prescribed amortised cost valuation method is used.

The amount of outstanding claims provision at the date of calculation is determined as the aggregate amount of money payable to the insured (beneficiary) in relation to:

- Insurance events reported to the insurer under the set procedure; - Survival until a certain age, date or other event provided by life insurance contract; - Early termination of life insurance contracts providing for payment of surrender benefits.

To calculate the ultimate amount of outstanding claims provision, these amounts are increased by claims handling expenses. For the purposes of IFRS the Group measures provision for claims handling expenses taking into account the statistical data for the reporting period. 50 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

19 Evaluation of Insurance Liabilities (continued)

The amount of incurred but not yet reported loss provision is calculated based on statistics of claims under all insurance contracts (under insurance agreements including the risk of survival until a certain age, date or other event “the amount at risk” is used for the statistics of claims), using the Chain Ladder method.

Provision for additional payments (insurance bonuses) at the date of calculation is determined as accumulated cost of accrued additional payments (insurance bonuses), the insured (policyholder, beneficiary) is entitled to under the insurance contract, less amount of additional payments (insurance bonuses) paid earlier.

Provision for options and guarantees represents the evaluation of insurance liabilities, not taken into account in the course of setting up mathematical provision and provision for additional payments (insurance bonuses) and derived from the following parameters of life insurance contract: the insurance amount and / or the amount of additional payments, the insured (policyholder, beneficiary) is entitled to under the insurance contract, that depend on the profitability of asset or a group of assets, provided by the insurance contract.

Reinsurers’ share of life insurance liabilities is evaluated based on reinsurance contracts terms.

Equalisation provision is calculated in case the gross premium written is insufficient to set up a mathematical provision, when the reserved net premium (cilmerised net premium) exceeds 98% of the gross premium written under life insurance contract. The amount of equalisation provision at the date of insurance event is defined as the actuarial value of difference between the upcoming receipts of reserved net premiums and 98% of gross premium written payments.

The Group performs liability adequacy test to assess, whether its recognised insurance liabilities under life insurance contracts (mathematical provision, provision for additional payments (insurance bonuses), provision for expenses on servicing insurance obligations, equalisation provision) are adequate using current estimates of future cash flows. The test considers current estimates of all contractual cash flows and of related cash flows.

The Group makes estimations and assumptions to project the amounts of assets and liabilities for future periods. Such estimations and assumptions include mortality rates, cancellation rates, expenses and investment income. Estimations and assumptions are based on the Group’s expectations about future events which are believed to be reasonable under the circumstances.

The Group performs the analysis of sensitivity of recognised insurance liabilities under endowment, survival and pension contracts to changes in mortality and profitability rates assumptions, which results in evaluation of relevant changes in the amount of liabilities. A significant level is a level of change in assumptions, at which changes in liabilities based on the liability adequacy test result in origination / removal of deficit in provision.

The table below represents a significant level of changes in estimated mortality and discount rates and amounts of liability adjustments that will be required in case mortality and discount rates estimates change:

Impact on life insurance Impact on life insurance liabilities at 31 December liabilities at 31 December Assumption Change in variable 2018, RR million 2017, RR million

+ 10% + 131 + 7 Mortality rate change - 10% - 122 - 7 + 1% + 3 468 + 23 Discount rate change - 1% - 3 210 - 23

Liabilities under non-life insurance contracts

The Group uses a number of statistical methods to estimate ultimate claims for all types of risks. The Chain- Ladder method, the method based on independence of standard increments of losses from the occurrence period and Bornhuetter-Ferguson method are most frequently used for this purpose. Information on paid or incurred claims may be used as a statistical database for evaluation.

51 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

19 Evaluation of Insurance Liabilities (continued)

The Chain-Ladder method can be applied to claims paid or to the amount of claims reported but not yet settled. The main approach implies analysis of claims development factors for past periods and selection of estimated development factors based on the previous experience. Afterwards, selected development factors are applied to aggregated loss data for each period within which an insurance event occurs for the purpose of estimation of ultimate claims for each period.

The Chain Ladder method mostly fits developed lines of business with a relatively stable development model implying independence of mathematical expectation of individual development coefficients from loss occurrence period. It is less useful when an insurer does not have a developed experience in claims in a specific line of business.

Bornhuetter-Ferguson method is preferred where there is ground to suggest independence of mathematical expectation of individual development coefficients from loss occurrence period and independence of mathematical expectation of loss from loss occurrence period.

The method based on independence of standard increments of losses from occurrence period is based on the assumption that the increments of loss normalised to the parameter of amount do not depend on the period of insurance event occurrence and have similar distributions. If no sufficiently homogeneous statistics is available, this method is preferable to the Chain Ladder method, as it is less exposed to the impact of inhomogeneity of claims statistics, therefore, it may give more smoothed estimation of loss provision in case of extremely high or extremely low values in claims triangle.

If any assumptions of certain method are obviously not realised, however, some consistent pattern is observed, such methods may be used with some modifications subject to selected coefficients.

If there is insufficient statistical information to identify the full development of losses and to differentiate between the observable losses under significant insurance contracts and other similar contracts, loss provision may be calculated using the expected loss method. An expected loss could be set as equal to the loss ratio set in the tarification of a specific contract slightly adjusted upward to ensure the sufficient level of prudence. This approach was used to evaluate loss provision for obligatory state personal accident insurance of life and health of employees of Federal National Guard Troops Service of the Russian Federation (hereinafter – “RF FSVNG”) at 31 December 2018 and VMI contract for employees of JSCo RZD at 31 December 2017.

The final estimation of loss provision for each period of loss in each line of business depends on how adequate each method or technique is to observable events over the past periods. In some cases different claims evaluation techniques or a combination of several techniques can be selected for certain insurance event periods within the same line of business. Significant unusual claims that can substantially distort the results of computations are excluded from the analysis.

OCP is established based on the expert review. IBNR is calculated for each occurrence period as a difference between a projected ultimate cost of claims incurred within this period and an amount of reported, but not yet settled claims within the same period. IBNR for each period cannot be less than zero.

Loss provision is adjusted subject to subrogation component, which is calculated using actuarial methods based on historical data on cash inflows under subrogation and recourse claims. For calculation purposes the data is grouped by quarters of insurance events for which claims are put in and by quarter of actual cash receipt. In relation to the resulting development triangles actuarial methods similar to those used for calculation of provisions are applied.

Property insurance. Property insurance represents 26% (the year ended 31 December 2017: 33%) of non-life portfolio. In the year ended 31 December 2018 92% (the year ended 31 December 2017: 100%) of property insurance of the Group was underwritten by the Company.

Significant part of this line of business is represented by property and construction risks insurance of large corporate clients, such as PJSC Gazprom, PJSC NK Rosneft, JSCo RZD, companies of nuclear industry, electricity, etc.

52 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

19 Evaluation of Insurance Liabilities (continued)

Due to the nature of business there is a significant probability of large scale losses and the Group manages risks by means of reinsurance of property insurance portfolio, which includes obligatory excess of loss reinsurance as well as facultative reinsurance of individually large objects. The significant part of reinsurance risks falls on large European reinsurers with high international ratings. Therefore, the Group believes that the existing structure of reinsurance provides an adequate protection from significant losses that could materially impact its financial position.

The Company calculates loss provision for property insurance primarily using the method based on independence of standard increments of losses from occurrence period. Subsidiaries of the Group apply different modifications of the Chain-Ladder methods or use the expected loss method.

The evaluation of loss provision can be significantly affected by the revaluation of OCP regarding insurance events with a high degree of uncertainty in assessment of reimbursement. The settlement of large scale losses consists of several stages during which the final extent of damage is determined as a compromise for the contractual parties. In cases like these the amount of incurred loss is uncertain until claim settlement. The Group believes that the best evaluation of provision of this type is the amount of loss the parties approve.

The claims settlement trend indicates that property insurance is not a “long tail” business. However, the claims settlement is not intense, especially regarding significant claims. Thus, the insurance liability amount is relatively sensitive to reasonable changes in assumptions on duration of claims settlement process. Nevertheless, 10% or 20% shift of all claims from the original period of settlement (quarter) to the following quarter will give an immaterial change in liabilities.

The Group’s property claims settlement procedures are subject to claims inflation since the total claims payment amount is not finalised before the settlement moment. An introduction of additional nominal claim inflation of 3% per quarter will give rise to additional liabilities of RR 953 million (31 December 2017: RR 918 million).

Voluntary medical insurance. VMI represents 25% (the year ended 31 December 2017: 30%) of non-life portfolio. In the year ended 31 December 2018 98% (the year ended 31 December 2017: 99%) of gross premiums were underwritten by the Company.

The Group calculates loss provision for VMI using the Chain-Ladder method. For VMI of JSCo RZD employees loss provision is evaluated by Bornhuetter-Ferguson method.

The claims settlement trend indicates that VMI is not a “long tail” business. Thus, the amount of IBNR is not materially sensitive to reasonable changes in assumptions on duration of claim settlement process.

The Group’s claim settlement process is effectively a settlement of medical invoices, risk portfolio is well diversified and the Group does not anticipate a possibility of significant influence of claim inflation on liability for incurred claims.

Personal accident insurance. Personal accident insurance is comprised of ordinary personal accident insurance and obligatory state personal accident insurance of life and health of military officers and similar. Personal accident insurance represents 11% (the year ended 31 December 2017: 3%) of non-life portfolio. In the year ended 31 December 2018 20% (the year ended 31 December 2017: 98%) of gross premiums were underwritten by the Company.

For valuation of loss provision in this line of business several segments are distinguished corresponding to different clients` groups. Loss provisions under personal accident insurance are calculated using the method based on independence of standard increments of losses from occurrence period under paid and incurred losses and the expected loss method under obligatory state personal accident insurance of life and health of RF FSVNG employees.

Subsidiaries of the Group apply different modifications of the Chain-Ladder methods or use the expected loss method.

53 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

19 Evaluation of Insurance Liabilities (continued)

The claims settlement trend indicates that personal accident insurance is not a “long tail” business. Thus, the amount of IBNR is not materially sensitive to reasonable changes in assumptions on duration of claim settlement process.

Personal accident risk portfolio is well diversified and the Group does not anticipate a possibility of significant influence of claim inflation on liability for incurred claims.

CASCO. CASCO represents 4% (the year ended 31 December 2017: 5%) of non-life portfolio. In the year ended 31 December 2018 98% (the year ended 31 December 2017: 99%) of the Group’s CASCO insurance premiums were underwritten by the Company.

The Company calculates loss provision for CASCO using primarily the Chain-Ladder method based on claims incurred. Provisions for subsidiaries and for assumed reinsurance are calculated using other methods, however, the share of provisions for the above segments is insignificant.

The claims settlement trend indicates that CASCO is not a “long tail” business. However, the claims settlement process is not as intense as under VMI. The insurance liability amount is relatively sensitive to reasonable changes in assumptions on duration of claims settlement process. The 10% shift of all claims paid and reported from the original period of settlement (quarter) to the following quarter will decrease liabilities by RR 13 million (31 December 2017: give a rise to surplus liabilities of RR 20 million).

The Group does not anticipate any material effect of claims inflation on its liability for paid claims.

Ultimate claims estimations. The table below represents the adequacy analysis of the Group’s gross loss provisions:

Claim occurrence year RR million 2014 2015 2016 2017 Total

Estimate of ultimate claims - at the end of the claim occurrence year 76 085 99 885 103 594 99 552 - one year later 70 795 101 654 105 342 - two years later 66 945 88 592 - three years later 63 527

Current estimate of cumulative claims paid 63 527 88 592 105 342 99 552 357 013 Cumulative claims paid to date (61 477) (82 773) (90 625) (62 280) (297 155)

Liabilities recognised in the consolidated statement of financial position 2 050 5 819 14 717 37 272 59 858

Provision for prior years’ losses 1 926

Liabilities recognised in the consolidated statement of financial position under losses of subsidiaries occurred before their acquisition date 89 906 886 19 026 20 907 Provisions for prior years’ losses of acquired subsidiaries 1 823

Total gross OCP and IBNR provision (Note 18) 84 514

54 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

20 Payables

RR million 31 December 2018 31 December 2017

Payables under insurance contracts 1 337 724 Payables to insurance agents and brokers 198 111 Unaccomplished settlements under insurance, coinsurance and reinsurance operations 39 43 Payables under ceded reinsurance contracts 18 1

Total payables under life insurance, coinsurance and reinsurance operations 1 592 879

Payables to insurance agents and brokers 14 947 15 291 Payables under insurance contracts 6 733 1 364 Unaccomplished settlements under insurance, coinsurance and reinsurance operations 3 706 3 442 Payables under ceded reinsurance contracts 2 117 1 541 Payables under assumed reinsurance contracts 190 1 194 Payables under direct claims settlement transactions 180 103 Payables under depo premiums and claims 11 -

Total payables under non-life insurance, coinsurance and reinsurance operations 27 884 22 935

Unaccomplished settlements under business combination (Note 37) 13 486 - Settlements with suppliers and contractors 179 356

Total financial payables 13 665 356

Payables to employees 5 550 3 518 Payables to social funds 1 504 1 192 Taxes payable other than income tax 139 172 Other non-financial payables 167 147

Total non-financial payables 7 360 5 029

Total payables 50 501 29 199

21 Other Liabilities

RR million 31 December 2018 31 December 2017

Payables to medical centres under OMI operations 2 035 1 332 Life insurance liabilities under investment contracts with discretionary participation feature 1 081 3 Other 854 509

Total other financial liabilities 3 970 1 844

OMI fund for medical services payment 39 327 14 453 Provision for legal cases 4 083 1 783 Payables to TFOMI 161 112 Other 368 105

Total other liabilities 43 939 16 453

55 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

21 Other Liabilities (continued)

Life insurance liabilities under investment contracts with DPF:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January 3 - 3 5 - 5 Movements in provision due to claims paid (1) - (1) (2) - (2)

At 31 December 2 - 2 3 - 3

Life insurance liabilities under investment contracts without DPF:

2018 2017 Reinsurers’ Provisions, Reinsurers’ Provisions, Gross share of net of Gross share of net of RR million provision provision reinsurance provision provision reinsurance

At 1 January ------Movements in provision due to premiums written 474 - 474 - - - Movements in provision due to accrued interest expenses 15 - 15 - - - Other changes (11) - (11) - - - Acquisition of subsidiary (Note 37) 601 - 601 - - -

At 31 December 1 079 - 1 079 - - -

22 Share Capital and Reserves

31 December 2018 31 December 2017 Inflation Inflation Number of Nominal adjusted Number of Nominal adjusted RR million shares amount amount shares amount amount

Ordinary shares 9 351 165 25 061 25 278 9 351 165 25 061 25 278

Total share capital 9 351 165 25 061 25 278 9 351 165 25 061 25 278

All ordinary shares have a nominal value of RR 2 680 per share. Each share carries one vote. At 31 December 2018 and 31 December 2017 all shares were paid.

During the year ended 31 December 2018 the Company bought back treasury shares that were later transferred as part of consideration for the acquisition of LTD VTB Insurance (Note 37).

During the year ended 31 December 2017 the Group disposed of the treasury shares recognised in equity at 31 December 2016 (Note 37).

At 16 May 2018 the Company declared dividends for the year ended 31 December 2017 in the total amount of RR 8 500 million, or RR 909 per ordinary share, and paid them out in the second half of the year ended 31 December 2018.

At 20 June 2017 the Company declared dividends for the year ended 31 December 2016 in the total amount of RR 1 496 million, or RR 160 per ordinary share, and paid them out in the second half of the year ended 31 December 2017.

56 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

22 Share Capital and Reserves (continued)

At 12 December 2017 the Company declared dividends for 9 months ended 31 December 2017 in the total amount of RR 7 004 million, or RR 749 per ordinary share, and paid them out in the second half of the year ended 31 December 2017.

In accordance with Russian legislation, dividends may only be distributed to the shareholders of the Company from accumulated retained and unreserved earnings based on the Company’s financial statements prepared in accordance with Russian accounting regulations. At 31 December 2018 retained and unreserved earnings calculated in accordance with Russian accounting regulations amount to RR 104 035 million (31 December 2017: RR 59 286 million).

Analysis of other comprehensive income by item for each component of equity is as follows:

Attributable to the shareholders of the Company Total Non- Fair value reserve for Currency Revaluation controlling

financial assets translation reserve for interest RR million available for sale reserve premises Total (Note 23)

2017 Revaluation 455 - - 455 - 455 Transfer to profit or loss 149 - - 149 - 149 Change in currency translation reserve - 16 - 16 24 40 Change in revaluation reserve for premises (Note 16) - - (429) (429) - (429) Share in other comprehensive income of associates (Note 11) 21 - - 21 - 21 Income tax effect (Note 30) (125) - 83 (42) - (42)

Total other comprehensive income / (loss) 500 16 (346) 170 24 194

2018 Revaluation (828) - - (828) - (828) Transfer to profit or loss (43) - - (43) - (43) Change in currency translation reserve - 46 - 46 36 82 Change in revaluation reserve for premises (Note 16) - - (202) (202) - (202) Income tax effect (Note 30) 174 - 43 217 - 217

Total other comprehensive (loss) / income (697) 46 (159) (810) 36 (774)

57 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

23 Non-controlling Interest

The following table provides information about each subsidiary that has non-controlling interest.

Total comp- rehensive Accumulated income non- Place of Non- attributable to controlling business and control- Disposal of non- interest in country of ling subsidiary Dividends controlling the RR million incorporation interest (Note 37) paid interest subsidiary

Year ended 31 December 2018

SOGAZ a.d.o. NOVI SAD Serbia 49% - - 47 196

Total - - 47 196

Year ended 31 December 2017

SOGAZ a.d.o. NOVI SAD Serbia 49% - (2) 32 149 The Russian JSC YUZHURALZHASO Federation 2,05% (3) - - -

Total (3) (2) 32 149

In the first quarter of the year ended 31 December 2017 the Group sold out JSC YUZHURALZHASO.

RR million Notes 2018 2017

Non-controlling interest at 1 January 149 122 Share in other comprehensive income of subsidiaries 36 24 Share in profit of subsidiaries 11 8 Disposal of subsidiaries 37 - (3) Dividends paid to non-controlling shareholders - (2)

Non-controlling interest at 31 December 196 149

Summarised financial information of subsidiaries for the year is presented in the table below:

Total Non- Non- Gross compre- Current current Current current premiums hensive Cash RR million assets assets liabilities liabilities written Profit income flows

Year ended 31 December 2018

SOGAZ a.d.o. NOVI SAD 422 396 261 - 379 23 97 22

Year ended 31 December 2017

SOGAZ a.d.o. NOVI SAD 452 184 185 - 329 17 66 6

58 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

24 Analysis of Premiums and Claims

Premiums and claims information for the main lines of business of the Group is set out below:

2018 2017 Gross Gross premiums Gross claims premiums Gross claims RR million written paid written paid

Property insurance 58 292 (32 132) 59 161 (11 888) VMI 56 617 (49 572) 53 119 (46 584) Personal accident insurance 24 080 (2 964) 4 512 (2 321) OMTPL 15 805 (11 121) 14 840 (6 805) CASCO 10 023 (3 018) 8 160 (1 433) Obligatory state personal accident insurance 8 640 (7 484) 6 792 (5 208) Aircraft insurance 5 475 (2 537) 5 261 (3 214) Mortgage insurance 5 461 (513) 2 341 (298) Cargo insurance 3 120 (176) 2 828 402 Voluntary third party liability insurance 2 770 (417) 2 338 (470) Space objects insurance 2 302 (6 908) 2 204 (965) Hull and marine insurance 2 100 (320) 1 594 (226) OIHF 1 457 (370) 1 127 (378) OTPLIC 1 210 (123) 1 000 (94) Life insurance 27 592 (5 381) 11 970 (3 490)

Total 224 944 (123 036) 177 247 (82 972)

In the year ended 31 December 2016 cargo insurance claim of RR 567 million was paid on the basis of the Court of Arbitration decision. Due to cancelation of this decision, the refund in the amount of RR 567 million was obtained in the year ended 31 December 2017. It was recognised as income in claims paid under cargo insurance in the consolidated financial statements for the year ended 31 December 2017.

25 Acquisition Costs Net of Commission Income from Ceded Reinsurance

RR million 2018 2017

Agent commissions 28 019 5 202 Staff costs and social security expenses 7 102 6 261 Cedent commissions 1 187 824 Brokerage commissions 974 615 Contributions from insurance premiums under obligatory types of insurance 549 510 Marketing expenses 165 72 Printing policies costs 45 44 Surveyor expenses 19 12 Other acquisition costs 358 327

Total acquisition costs 38 418 13 867 Less: commission income from ceded reinsurance (2 779) (2 965) Change in deferred acquisition costs (18 109) (28) Change in deferred commission income (8) 507

Total acquisition costs net of commission income from ceded reinsurance 17 522 11 381

59 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

25 Acquisition Costs Net of Commission Income from Ceded Reinsurance (continued)

RR million 2018 2017

Deferred acquisition costs at 1 January 3 215 3 187

Deferred acquisition costs for the period 28 225 6 173 Amortisation of deferred acquisition costs (10 116) (6 145) Acquisition of subsidiaries (Note 37) 33 918 -

Deferred acquisition costs at 31 December 55 242 3 215

Deferred commission income at 1 January 2 112 1 605

Deferred commission income for the period 2 483 3 176 Amortisation of deferred commission income (2 491) (2 669) Acquisition of subsidiaries (Note 37) 36 -

Deferred commission income at 31 December 2 140 2 112

26 Other Insurance Income and Expenses

Other insurance income comprises the following:

RR million 2018 2017

Income from direct claims settlement transactions 1 447 1 196 Income from inward reinsurance payables write-off 115 - Other income 187 166

Total other insurance income 1 749 1 362

Other insurance expenses comprise the following:

RR million 2018 2017

Amortisation of PVIF asset (Note 17) 5 352 - Expenses from direct claims settlement transactions 1 866 1 251 Increase in bad debts provision under insurance, coinsurance, inward and ceded reinsurance receivables (Note 12) 313 350 Other expenses 223 17

Total other insurance expenses 7 754 1 618

27 Interest Income

RR million 2018 2017

Deposits with banks 9 270 10 176 Financial assets available for sale 4 892 4 004 Financial assets held to maturity 1 931 544 Financial assets at fair value through profit or loss 1 372 1 363 Other 28 5

Total interest income 17 493 16 092

60 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

28 Administrative and Other Operating Expenses

Administrative and other operating expenses comprise the following:

RR million 2018 2017

Salaries, bonuses and other payments to the staff 5 856 4 537 Social security expenses 1 410 1 321 Provision for unused vacations 474 371 Other staff costs 66 55 Total staff costs 7 806 6 284

Information and consulting services 2 046 1 339 Expenses related to premises and equipment other than depreciation 1 988 2 015 Depreciation and amortisation (Notes 16, 17) 1 891 1 083 Operating lease expenses 1 567 1 179 Advertising and marketing services 1 512 1 194 Materials 377 284 Provision for legal cases 252 201 Transport expenses 171 176 Penalties 156 194 Goodwill impairment - 456 Other expenses 1 675 1 490

Total administrative and other operating expenses 19 441 15 895

Staff costs for the year ended 31 December 2018 of RR 7 102 million and RR 2 642 million (the year ended 31 December 2017: RR 6 261 million and RR 2 545 million) are included in the consolidated statement of profit or loss and other comprehensive income within acquisition costs net of commission income from ceded reinsurance and claims handling expenses, accordingly, as they relate to acquisition and renewal of insurance contracts and claims handling activity.

29 Other Operating Income

Other operating income comprises the following:

RR million 2018 2017

Income from OMI operations 3 765 2 640 Income from provision of medical services 1 798 1 009 Rental income 218 152 Gain from disposal of premises and equipment 6 9 Recovery of provision for impairment of other receivables (Note 12) - 379 Other income 453 327

Total other operating income 6 240 4 516

61 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

30 Income Tax

Income tax expense comprises the following:

RR million 2018 2017

Current income tax 3 791 5 050 Deferred income tax 9 179 3 764

Income tax expense 12 970 8 814

Income tax rate applicable to the majority of the Group’s income is 20%. Income tax rates applicable to subsidiaries located in Cyprus and Serbia are 10% and 15%, respectively. Reconciliation between theoretical and actual taxation charge is provided below:

RR million 2018 2017

Profit before tax 63 488 39 376

Theoretical tax charge at statutory rate of 20% 12 698 7 875

Tax effect of items that are not deductible or taxable for taxation purposes:

- Non-deductible expenses 563 680 - Income taxed at different rates (209) (94) - Non-taxable Income (13) - - Goodwill impairment - 91 - Other (74) 294 Changes in unrecognised deferred tax asset 5 (32)

Income tax expense 12 970 8 814

In the year ended 31 December 2018 recovery of deferred income tax of RR 217 million (the year ended 31 December 2017: deferred income tax expense of RR 42 million) was recognised directly in other comprehensive income due to fair valuation of financial assets available for sale, fair valuation of premises and translation of assets and liabilities in the presentation currency of consolidated financial statements.

The differences between IFRS and respective statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for consolidated financial reporting purposes and their tax bases. Tax effect of movements in these temporary differences is detailed below.

62 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

30 Income Tax (continued)

Acquisition of Credited / Credited to other 31 1 January subsidiary (charged) to profit comprehensive December RR million 2018 (Note 37) or loss income (Note 22) 2018

Tax effect of deductible temporary differences: Financial assets at fair value through profit or loss - 344 59 - 403 Financial assets available for sale - - - 174 174 Receivables 913 11 (529) - 395 Reinsurers’ share of insurance provisions 627 (855) 1 668 - 1 440 Deferred commission income 422 7 (1) - 428 Payables 1 025 365 866 - 2 256 Other liabilities 404 66 27 - 497 Tax losses carried forward 272 412 1 219 - 1 903 Other - 6 17 - 23

Gross deferred tax asset 3 663 356 3 326 174 7 519 Less: unrecognised deferred tax asset (272) - (5) - (277)

Net deferred tax asset prior to offset with deferred tax liability 3 391 356 3 321 174 7 242

Recognised deferred tax asset 218 367 1 336 27 1 948

Tax effect of taxable temporary differences: Investments in associates 93 - (4 410) - (4 317) Investment property (44) (98) 11 - (131) Deferred acquisition costs (642) (6 784) (3 619) - (11 045) Premises and equipment (886) 33 84 43 (726) Intangible assets - (10 213) 1 180 - (9 033) Insurance provisions (6 903) (930) (5 674) - (13 507) Other (112) (54) (72) - (238)

Gross deferred tax liability (8 494) (18 046) (12 500) 43 (38 997)

Recognised deferred tax liability (5 321) (18 057) (10 515) 190 (33 703)

63 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

30 Income Tax (continued)

(Charged) / Disposal of (Charged) / credited to other 1 January subsidiaries credited to profit comprehensive 31 December RR million 2017 (Note 37) or loss income (Note 22) 2017

Tax effect of deductible temporary differences: Investments in associates 308 - (211) (4) 93 Receivables 515 - 398 - 913 Reinsurers’ share of insurance provisions (423) - 1 050 - 627 Deferred commission income 321 - 101 - 422 Payables 1 360 - (335) - 1 025 Other liabilities 592 (52) (136) - 404 Tax losses carried forward 279 - (7) - 272 Other 1 - (1) - -

Gross deferred tax asset 2 953 (52) 859 (4) 3 756 Less: unrecognised deferred tax asset (304) - 32 - (272)

Net deferred tax asset prior to offset with deferred tax liability 2 649 (52) 891 (4) 3 484

Recognised deferred tax asset 22 - 190 6 218

Tax effect of taxable temporary differences: Investment property (49) - 5 - (44) Deferred acquisition costs (637) - (5) - (642) Premises and equipment (861) - (31) 6 (886) Intangible assets (1) - 1 - - Insurance provisions (2 296) - (4 607) - (6 903) Other (50) - (18) (44) (112)

Gross deferred tax liability (3 894) - (4 655) (38) (8 587)

Recognised deferred tax liability (1 267) (52) (3 954) (48) (5 321)

In the context of the Group’s current structure, tax losses and current tax assets of different Group companies may not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may accrue even when there is a net consolidated tax loss. Therefore, deferred income tax assets and liabilities are offset only when they relate to the same taxable entity. At 31 December 2018 the Group recognised deferred tax liability of RR 33 703 million (31 December 2017: RR 5 321 million) and deferred tax asset of RR 1 948 million (31 December 2017: RR 218 million).

64 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

30 Income Tax (continued)

At 31 December 2018 the Group did not recognise deferred tax liability in respect of temporary differences related to investments in subsidiaries of RR 773 million (31 December 2017: RR 591 million), as the Group is able to control the timing of those temporary differences reversal and does not intend to reverse them in the foreseeable future.

31 Financial and Insurance Risk Management

Risk management function within the Group is carried out in respect of financial risks (insurance, credit, market and liquidity risks), operational risks (including legal, reputation and compliance risk) and strategic risks. The purpose of the financial risk management system is to protect the Group’s interests.

The primary objective of financial risk management is to ensure the optimal relation between the expected income and risks. At the same time, the general level of risk is limited by the amount of available capital. Additional limitations are imposed by Russian legislation in respect of requirements to assets accepted as coverage of insurance reserves and equity and the ratio between actual and regulatory solvency margin of insurance companies of the Group.

For financial risk management purposes the Group has formulated the internal financial risk management policy where, along with regulations of the Russian Federation and generally accepted risk management principles, own valuation techniques, indicators and management tools are used. Based on the above, the Group has developed a system of parameters for assigning operations to certain risk groups and their qualitative and quantitative assessment.

The Group’s risk management strategy is based on compliance with risk appetite – an aggregate level of risk the Group considers acceptable for implementation of its business strategy. Risk appetite is set by the Declaration of risk appetite approved by the Company’s Board of Directors. The risk management strategy provides for:

 Compliance of the Group’s operations with legislation and state regulatory and control authorities’ requirements;  Application of Solvency II principles and methodology to design risk management system;  Maintenance of the leading position in Russian insurance market in terms of reliability and solvency;  Protection of the Group’s long-term competitive advantages: reputation and brand;  Appointment of risk owners responsible for managing individual types of risks within their competencies;  Delegation of risk management processes to the level that ensures their most efficient application;  Generation of regular reports on risks submitted to the Group management.

Risk management process in the Group includes systematic addressing of the following tasks:

 Risk identification – identification and initial analysis of risks arising in the process of the Group’s activities. Risks are identified on a regular basis in accordance with internal risk management regulation;  Determining approaches to different types of risk and definition of risk management criterion which is performed subject to maximum compliance with state regulation and control requirements and according to the Group’s strategy. Risks that the Group is unwilling to accept are entirely eliminated. The Group determines maximum level of risks that it is ready to accept;  Performing qualitative and / or quantitative evaluation (measurement) of certain types of risks and cumulative risk valuation;  Establishing relationships between separate types of risk for the purpose of evaluation of impact of events, planned for restricting one type of risk, on decrease or increase in the level of other risks;  Evaluating acceptability and reasonableness of aggregate risks assumed by the Group and optimising risks on the basis of established risk management criteria;

65 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

 Making decisions on risk management measures to bring risks to optimal level;  Controlling the efficiency of measures taken.

In implementing various types of financial risk management for the purpose of risk minimisation, the Group uses the following procedures and instruments:

 Monitoring – calculating the level of risk, studying its dynamics over time and analysing reasons for changes. Monitoring precedes other procedures and is carried out on a regular basis;  Diversification – reducing the level of aggregate risk by means of acceptance of high number of individual risks with weak correlation between themselves. Diversification often allows the Group to reduce the level of risk without considerable reduction of income;  Limiting operations – setting limits on risk levels and following-up subsequent compliance. The limit level reflects the Group’s readiness to take on certain risk. Limiting operations procedure is aimed to set the maximum allowable risk level for each area of activity and type of risk and to clearly allocate functions and responsibility;  Scenario analysis or stress testing. Scenario analysis or stress testing is used in forecasting possible development trends. During scenario analysis the Group develops ways of responding to unfavourable external changes. Especially unfavourable scenarios are analysed with stress testing which is carried out on a regular basis.

The primary approach to financial risk management is to establish risk limits, and then to ensure compliance with these limits. Within its insurance risk management, the Group determines its own retention limits by lines of business. Risks exceeding the limits set are ceded to reinsurance. For market risks, limits are set by types of assets and industries. For credit risks, limits are set by individual counterparties, depending on the level of their solvency. Moreover, there is a policy implying approval of significant transactions and related party transactions. The amounts of limits are defined based on internal regulations of the Group. Limits are approved by the following management bodies – Chairman of the Board, the Board, Investment Committee and Reserves committee. The limit level is subject to review at least once a year, unless otherwise stated on approval, and as required.

Credit risk. The Group takes on exposure to credit risk which is the risk that one party to a contract or transaction with a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Credit risk arises as a result of the Group’s investment operations on insurance reserves and equity placement, insurance, reinsurance and other transactions with counterparties, giving rise to financial assets and liabilities.

The risk is associated with counterparties’ potential insolvency and changes in their credit rating. The Group monitors its counterparties’ solvency and undertakes actions in order to minimise the potential credit risk.

The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets in the consolidated statement of financial position. The impact of possible offset of assets and liabilities to reduce potential credit risk exposure is not significant.

Expected losses estimated as part of credit risk analysis are the function of probability of default, exposure at default and losses given default (subject to partial or full repayment of liabilities after the default). Probability of default is estimated using international and national ratings and internal mechanisms of risk assessment based on internal techniques designed for various categories of counterparties and industries / sectors. The techniques are developed and based on statistical analysis with application of integral expert valuation (judgement) including review of financial position and solvency of counterparties as well as their market position and changes in quality of their assets.

In order to reduce credit risks on ceded reinsurance, the Group selects reinsurers to whom the risks are ceded. The main criterion is availability and level of rating by an international rating agency (Standard & Poor’s, Moody’s, Fitch, A.M. Best) and rating agencies of the Russian Federation (Expert RA and ACRA). Risks may be ceded to reinsurers with ratings below BBB+ in terms of Standard & Poor’s or equivalent rating of other agencies only if they are included in security list and limits on the amount of risk are set.

66 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

The procedure of regular review of the security list is set by the Group’s internal regulations.

Under investment operations, credit risks are primarily related to the following types of transactions:

 Cash placement on deposits with credit institutions and issue of loans;  Investments in debt securities.

The primary method of credit risk reduction is setting limits on such transactions. Setting a limit restricts the volume of losses from conducting transactions exposed to credit risk with each counterparty. Limits are opened for counterparty banks, debtors and issuers of debt securities. The Group has set a number of mandatory requirements for counterparties for setting a limit.

Determining the maximum acceptable amount of operations with counterparties proportionate to credit risk exposure depends on the following factors:

 Counterparty’s financial position;  Counterparty’s credit history;  Type of transaction performed;  Term of the transaction.

The main purpose of the comprehensive review of the counterparty’s financial position is obtaining objective evaluation of its solvency, financial stability, business and investment activity. Technologies used ensure comprehensive evaluation of counterparty’s financial position and include an algorithm of actions for setting a limit on conducting transactions which implies four stages:

 Preparing primary data and collecting information;  Carrying out a comprehensive review, evaluating the counterparty’s financial position and setting an internal credit rating;  Calculating the limit;  Setting and monitoring the limits.

During the whole period for which a limit on conducting transactions with counterparty is set the Group monitors its solvency, financial stability, business and investment activity (qualitative and quantitative valuation parameters). To ensure regular evaluation of risks associated with a counterparty, reports are monitored and limits are reviewed with frequency depending on the reliability pool which this counterparty is assigned to.

If any operational information showing worsening of the counterparty’s financial position, and increased risk of interaction with such counterparty is identified, or if other negative information on the counterparty is obtained, the Group makes decision to improve control over transactions with this counterparty, to impose restrictions for operations or to terminate relations with it.

In the ordinary course of insurance activities accounts receivable arise. Management of the Group performs the following procedures to control the level of accounts receivable:

 The total amount of accounts receivable is analysed weekly by the deputy Chairman of the Board together with insurance directors;  Information about delays in payments is analysed based on terms of insurance contracts. Overdue payments are weekly reported to the deputy Chairman of the Board;  Clients are analysed on a quarterly basis. Findings of such an analysis are disclosed in corporate reports submitted to management and shareholders;  Bad debt provisions are set up based on available information and written off on an individual basis. The amount of debts written off is not material for the Group.

67 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

Credit quality of undue and unimpaired financial assets may be determined by rating (if any) received from an independent rating agency. Counterparties are divided into 4 categories based on the stability level and other risk factors (Moody’s, S&P, Fitch ratings, ACRA or Expert RA are used for allocation into each category).

Category A: possessing financial stability rating from “BBB-” and above (Fitch, S&P), “Baa3” and above (Moody’s), “B++” and above (A.M. Best), “AAA(RU)” (ACRA), “ruAAA” (Expert RA).

Category B: possessing financial stability rating from “BB-” to “BB+” (Fitch, S&P), from “Ba3” to “Ba1” (Moody’s), from “B-” to “B+” (A.M. Best), from “BBB-(RU)” to “AA+(RU)” (ACRA), from “ruBBB-” to “ruAA+” (Expert RA).

Category C: possessing financial stability rating from “B-” to “B+” (Fitch, S&P), from “B3” to “B1” (Moody’s), from “C-” to “C+” (A.M. Best), from “BB-(RU)” to “BB+(RU)” (ACRA), from “ruBB-” to “ruBB+” (Expert RA).

Category D: possessing financial stability rating “CCC” and lower (Fitch, S&P), “Caa1” and lower (Moody’s), “D” (A.M. Best), “B+(RU)” and lower (ACRA), “ruB+” and lower (Expert RA).

The analysis of undue and unimpaired financial assets by credit quality at 31 December 2018 is as follows:

No RR million Category А Category B Category С Category D category Total

Cash and cash equivalents 2 070 5 056 28 - 6 7 160 Deposits with banks 111 988 90 980 3 820 - 4 206 792 Financial assets at fair value through profit or loss 6 876 19 315 2 426 - 411 29 028 Financial assets available for sale 47 627 18 329 - - 1 020 66 976 Receivables 3 179 2 470 102 3 36 984 42 738 Prepayments - - - - 599 599 Reinsurers’ share of insurance provisions 11 514 3 675 29 - 7 577 22 795 Financial assets held to maturity 17 459 56 783 320 - 201 74 763

Total financial assets 200 713 196 608 6 725 3 46 802 450 851

The analysis of undue and unimpaired financial assets by credit quality at 31 December 2017 is as follows:

No RR million Category А Category B Category С Category D category Total

Cash and cash equivalents 154 5 315 62 2 82 5 615 Deposits with banks 53 711 69 397 - - 957 124 065 Financial assets at fair value through profit or loss 5 333 6 231 2 063 - 253 13 880 Financial assets available for sale 35 220 23 436 - - 1 150 59 806 Receivables 2 714 3 231 380 47 29 720 36 092 Prepayments - - - - 446 446 Reinsurers’ share of insurance provisions 14 267 8 599 1 111 95 10 481 34 553 Financial assets held to maturity - 6 024 6 057 - 15 12 096 Assets held for sale and assets of a disposal group held for sale - - - - 289 289

Total financial assets 111 399 122 233 9 673 144 43 393 286 842

68 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

Market risk. The Group is exposed to market risks that arise from open positions in (a) foreign currency assets and liabilities, (b) interest rates and (c) equity instruments, exposed to general and specific market volatility. Management sets limits on the value of risk that may be accepted, that are monitored on a daily basis. However, the use of this approach does not prevent losses over these limits in the event of more significant market volatility.

In carrying out market risk evaluation, the focus should be placed on quantitative evaluation, i.e. evaluation of probable losses from appropriate financial instruments during a particular investment horizon. It allows reflecting risk of each position and portfolio risk in general and to arrange a classification by risk level.

Price risk. The Group has exposure to equity price risk. If equity prices at 31 December 2018 had been 2,19% (31 December 2017: 2,67%) lower, with all other variables held constant, profit for the year ended 31 December 2018 would have been RR 25 million (the year ended 31 December 2017: RR 16 million) lower, mainly as a result of revaluation of equity securities at fair value through profit or loss, and other components of equity would not have changed (the year ended 31 December 2017: would not have changed). The percentage of equities price changes used is an annual mean of absolute monthly changes of MICEX index that is assessed by management as volatility of equity market.

Interest rate risk. Interest rate risk arises as a result of possible impact of changes in market interest rates on the fair value of financial instruments or future cash flows from them. The management of the Group regularly sets and monitors limits on the level of mismatch of interest rate repricing that may be undertaken.

The analysis of sensitivity of profit or loss and equity to changes in fair values of financial assets at fair value due to fluctuations of interest rates, based on positions at 31 December 2018 and 31 December 2017 and in case of reasonably possible changes of 500 b.p. (31 December 2017: 500 b.p.), representing symmetric drop or growth of all yield curves, is presented below:

RR million 31 December 2018 Change in basis Sensitivity of profit or Currency points loss Sensitivity of equity

Russian roubles + / - 500 - / + 2 361 - / + 3 633 US dollar + / - 500 - / + 31 - / + 186

RR million 31 December 2017 Change in basis Sensitivity of profit or Currency points loss Sensitivity of equity

Russian roubles + / - 500 - / + 1 456 - / + 1 847 US dollar + / - 500 - / + 31 -

Management of the Group considers 500 b.p. (31 December 2017: 500 b.p.) change as a sufficiently accurate estimate of interest rates volatility under current market conditions.

Currency risk. The Group is exposed to effects of fluctuations in foreign currency exchange rates on its financial position and cash flows. At the year-end, the Group had balances in Russian roubles and other currencies, primarily US dollars and euro. In addition, part of losses incurred under insurance contracts is fixed in US dollars or euro at the date of loss recognition. Furthermore, a part of premiums is fixed in US dollars or euro at the date of insurance agreement. The Group is exposed to currency risk on these losses and premiums if foreign exchange rates fluctuate.

The Group manages currency risk by maintaining its assets denominated in US dollars and euro at the level required to meet its obligations. Management sets and controls limits on the value of risk that may be accepted by currencies and in general, on a regular basis.

69 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

The analysis of the Group’s monetary financial and insurance assets and liabilities by currency at 31 December 2018 is as follows:

31 December 2018 Russian Other RR million roubles US dollars Euro currencies Total

Monetary financial and insurance assets Cash and cash equivalents 3 042 563 3 487 92 7 184 Deposits with banks 203 035 1 534 2 137 86 206 792 Financial assets at fair value through profit or loss 26 353 2 675 - - 29 028 Financial assets available for sale 66 256 720 - - 66 976 Receivables 31 314 6 570 4 130 724 42 738 Prepayments 589 10 - - 599 Reinsurers’ share of insurance provisions 16 004 5 474 1 225 92 22 795 Financial assets held to maturity 53 283 20 744 688 48 74 763

Total monetary financial and insurance assets at 31 December 2018 399 876 38 290 11 667 1 042 450 875

Monetary financial and insurance liabilities Insurance provisions 153 020 34 516 2 533 617 190 686 Payables 37 438 3 719 1 674 310 43 141 Other financial liabilities 3 921 46 2 1 3 970

Total monetary financial and insurance liabilities at 31 December 2018 194 379 38 281 4 209 928 237 797

Net balance sheet position 205 497 9 7 458 114 213 078

70 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

The analysis of the Group’s monetary financial and insurance assets and liabilities by currency at 31 December 2017 is as follows:

31 December 2017 Russian Other RR million roubles US dollars Euro currencies Total

Monetary financial and insurance assets Cash and cash equivalents 2 428 2 620 503 80 5 631 Deposits with banks 118 117 5 766 126 56 124 065 Financial assets at fair value through profit or loss 13 105 775 - - 13 880 Financial assets available for sale 59 806 - - - 59 806 Receivables 24 904 3 709 6 992 487 36 092 Prepayments 446 - - - 446 Reinsurers’ share of insurance provisions 30 458 3 253 765 77 34 553 Financial assets held to maturity 9 861 1 952 106 177 12 096 Assets held for sale and assets of a disposal group held for sale 289 - - - 289

Total monetary financial and insurance assets at 31 December 2017 259 414 18 075 8 492 877 286 858

Monetary financial and insurance liabilities Insurance provisions 103 107 7 887 3 226 342 114 562 Payables 15 992 2 596 5 456 126 24 170 Other financial liabilities 1 842 - - 2 1 844

Total monetary financial and insurance liabilities at 31 December 2017 120 941 10 483 8 682 470 140 576

Net balance sheet position 138 473 7 592 (190) 407 146 282

The above analysis includes only monetary assets and liabilities. Investments in equity securities and non- financial assets and liabilities are not considered to give rise to any material currency risk.

The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the respective entities of the Group. No specific procedures, other than disclosed above, are applied by the Group to manage currency risk.

The table below presents sensitivities of net profit or loss to reasonably possible changes in exchange rates assessed by management as applied at the reporting date, with all other variables held constant:

The effect on profit or loss RR million 31 December 2018 31 December 2017

US dollar strengthening by 5% - 304 US dollar weakening by 5% - (304) Euro strengthening by 5% 298 (8) Euro weakening by 5% (298) 8 Other currencies strengthening by 10% 9 33 Other currencies weakening by 10% (9) (33)

71 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

Liquidity risk. Liquidity risk arises when the maturities of assets and liabilities do not match. The Group is exposed to daily calls on its available cash resources for claims settlement.

At 31 December 2018 and 31 December 2017 the management does not believe the current maturity profile of the Group’s financial and insurance assets and liabilities leads to material liquidity risk, taking into account the level of cash and deposits at the year-end as well as the nature of its securities portfolio that are realisable at a short notice if required.

For the purpose of liquidity risk evaluation the table below shows financial and insurance assets and liabilities at 31 December 2018 by their remaining expected maturity for insurance provisions and reinsurers’ share of insurance provisions and contractual maturity for all other categories.

On demand and less than From 3 to More than RR million 3 months 12 months 1 year Total

Assets Cash and cash equivalents 7 184 - - 7 184 Deposits with banks 146 855 48 267 11 670 206 792 Financial assets at fair value through profit or loss 939 2 373 31 537 34 849 Financial assets available for sale 793 19 375 46 813 66 981 Receivables 16 370 18 731 7 637 42 738 Prepayments 599 - - 599 Reinsurers’ share of insurance provisions 15 078 4 443 3 274 22 795 Financial assets held to maturity 262 2 461 72 040 74 763 Assets held for sale and assets of a disposal group held for sale - 3 497 - 3 497

Total financial and insurance assets 188 080 99 147 172 971 460 198

Liabilities Insurance provisions 42 291 36 311 112 084 190 686 Payables 19 085 21 320 2 736 43 141 Other financial liabilities 1 449 1 440 1 081 3 970

Total financial and insurance liabilities 62 825 59 071 115 901 237 797

Net position in financial and insurance obligations 125 255 40 076 57 070 222 401

Cumulative net position 125 255 165 331 222 401

72 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

For the purpose of liquidity risk evaluation the table below shows financial and insurance assets and liabilities at 31 December 2017 by their remaining expected maturity for insurance provisions and reinsurers’ share of insurance provisions and contractual maturity for all other categories.

On demand and less than From 3 to More than RR million 3 months 12 months 1 year Total

Assets Cash and cash equivalents 5 631 - - 5 631 Deposits with banks 67 488 46 219 10 358 124 065 Financial assets at fair value through profit or loss 542 1 532 14 260 16 334 Financial assets available for sale 4 188 3 173 52 448 59 809 Receivables 13 213 16 629 6 250 36 092 Prepayments 446 - - 446 Reinsurers’ share of insurance provisions 8 409 12 703 13 441 34 553 Financial assets held to maturity 56 955 11 085 12 096 Assets held for sale and assets of a disposal group held for sale - 289 - 289

Total financial and insurance assets 99 973 81 500 107 842 289 315

Liabilities Insurance provisions 25 497 33 940 55 125 114 562 Payables 8 974 12 828 2 368 24 170 Other financial liabilities 1 766 75 3 1 844

Total financial and insurance liabilities 36 237 46 843 57 496 140 576

Net position in financial and insurance obligations 63 736 34 657 50 346 148 739

Cumulative net position 63 736 98 393 148 739

Insurance risk. An insurance risk is a risk associated with any insurance contract arising from a possibility of insurance event occurrence and uncertainty of the amount of loss incurred. The very nature of an insurance contract implies that such a risk is likely to occur accidentally, and it is derived from possibility of the insurance event and uncertainty of the amount of the resulting claim. Results of evaluation of insurance liabilities are disclosed in Note 19.

Insurance risk is the most significant risk for the Group. Possible accumulation of significant claims in such lines of business as property insurance, marine insurance, liability insurance and others is the major factor that could have a significant impact on the Group’s financial results and performance indicators. Therefore, the Group chooses risk management policy and, first and foremost, reinsurance protection management policy, in order to minimise the impact of this factor.

The process of insurance risk management is implemented at stages from insurance tariffs development to insurance portfolio formation. The system of insurance products development and implementation enables the Group to minimise the following risks associated with possible unsuccessful implementations:

 Implementation of a product on the basis of unjustified insurance tariffs;  Implementation of a product not meeting market requirements;  Implementation of a product through inefficient sales channels.

The basic principle of insurance risk diversification is managing risks on the basis of a regulated tariff policy. The tariff policy is regulated on the basis of review of current portfolio structure, allocation of losses by various ranges of insurance amounts, collection of market data on other insurers’ loss experience and modelling of various loss realisation projections in future.

73 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

31 Financial and Insurance Risk Management (continued)

Insurance tariffs are set on the basis of analysis of the following factors:

 Expected loss ratio based on the analysis of own insurance portfolio and similar market products;  Commission rates based on market information;  Review of average market insurance tariffs.

Reinsurance. Depending on the size of insurance amount and types of insurance risks, the insurance contract may be self-retained by the Group or reinsured. Most insurance contracts are reinsured on the basis of obligatory reinsurance treaties. If a contract requires facultative reinsurance, the Group places risks in the market, among companies approved by the management of the Group.

In case of renewal of reinsurance treaties, the management of the Group approves limits on the basis of which the Group reinsures risks with one company or another. These limits are determined on the basis of the balance of assumed or ceded business, review of the reinsurer’s protection and review of the reinsurer’s financial position and claims handling experience as well.

Claims settlement. Under the insurance contract a policyholder should notify the insurer of the insurance event within the specified period. Claims settlement is carried out by special divisions of the Group, separate from the sales divisions. Claims are generally paid only after the Group receives all necessary documents confirming that the insurance event has actually occurred. If necessary, claims settlement documents are also reviewed by the economic security department, the legal department and the financial department. If at the moment of the claim payment the policyholder had an outstanding premium payable, such outstanding amount is deducted from the amount of the claim.

If the insurance contract has been reinsured, upon the receipt of the claim notification, the Group notifies the reinsurer about the reported claim. During the entire period of claim settlement, the reinsurer receives information on the progress of the settlement and additional expenses associated with the claim settlement. After the Group pays the claim, settlement documents are sent to the reinsurer. Loss reimbursement from the reinsurer is generally received by the Group within 90 days since the date of the direct claim payment.

Diversification of insurance portfolio. For reduction of insurance risk the Group also uses diversification of its insurance portfolio by underwriting large volume of medium and small risks together with significant risks. This, in particular, is achieved by means of developed branches network of the Group in the Russian Federation.

32 Capital Management

The Group’s objectives when managing capital are: (i) to comply with capital requirements set by Russian law and the insurance regulator, and (ii) to safeguard the Group’s ability to continue as a going concern.

Insurance companies of the Group are subject to the following regulatory requirements imposed on the level of share capital and assets accepted as coverage of insurance provisions and insurer’s equity (that are calculated based on the financial statements prepared in accordance with Russian statutory requirements):

 Compliance with requirements to solvency margin set by Instruction of the Central bank of the Russian Federation No. 3743-U dated 28 July 2015 On Calculation of the Regulatory Ratio of Equity (Capital) and Assumed Liabilities by Insurance Organisation;  Excess of net assets over share capital (set by the Federal law No. 208-FZ dated 26 December 1995 On Joint Stock Companies and the Federal law No. 14-FZ dated 8 February 1998 On Limited Liability Companies and the Order of the Ministry of Finance of the Russian Federation No. 84n dated 28 August 2014 On Approving the Method of Net Assets Valuation);  Compliance with requirements to assets accepted as coverage of insurance provisions (set by the Order of the Central bank of the Russian Federation No. 4297-U dated 22 February 2017 On Investing the Insurer’s Provisions and List of Assets Allowed for Investment);

74 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

32 Capital Management (continued)

 Compliance with requirements to composition and structure of assets accepted as coverage of the insurer’s equity (set by the Order of the Central bank of the Russian Federation No. 4298-U dated 22 February 2017 On Investing the Insurer’s Equity (Capital) and List of Assets Allowed for Investment);  Compliance with requirements to the minimal share capital (set by the Law of the Russian Federation No. 4015-1 dated 27 November 1992 On Organisation of Insurance Business in the Russian Federation).

Compliance with capital and assets adequacy ratios is monitored quarterly by means of reports reviewed and signed by the Group companies’ management. The Group maintains its capital to assets ratio at a level higher than the obligatory minimal value.

Calculation of the Company’s solvency margin on the basis of reports prepared in accordance with Russian legislation is provided in the table below:

RR million 31 December 2018 31 December 2017

Share capital formed by ordinary shares in accordance with Russian statutory requirements 25 278 25 278 Additional paid-in capital, including property revaluation in accordance with Russian statutory requirements 654 1 527 Reserve capital in accordance with Russian statutory requirements 1 253 873 Retained earnings of the reporting year and prior years in accordance with Russian statutory requirements 104 035 59 286 Less intangible assets (745) (62) Less impaired receivables (2 323) (546) Adjustment of insurance provisions (36 364) -

Total actual solvency margin 91 788 86 356

Regulatory solvency margin 25 586 21 726

Excess of the actual solvency margin over the regulatory solvency margin, % 258,74 297,48

The companies of the Group complied with all externally imposed capital and solvency margin requirements during the years ended 31 December 2018 and 31 December 2017.

The minimal level of share capital of entities engaged exclusively in OMI is set at RR 120 million, for non-life insurance companies – at RR 120 million, at RR 240 million for life insurance companies and at RR 480 million for companies holding a license for assumed reinsurance. At 31 December 2018 and 31 December 2017 all Group companies meet the above requirements.

33 Contingent Assets and Liabilities

Legal proceedings. From time to time in the normal course of business claims against the Group may be received. On the basis of its own estimates and internal and external professional advice management believes that no material losses will be incurred by the Group.

The Group was engaged as plaintiff in litigation proceedings in relation to various issues, such as collecting receivables under an insurance agreement, recognising an insurance agreement void pursuant to the non- payment of premiums by the insurer, claims recourse and other issues related to the activities of the Group. The Group was also involved in court proceedings as a defendant to claims mainly related to the denial of insurance claims payments. The Group divides proceedings based on probability of losses. For legal proceedings with high probability of losses, based on the opinion of internal experts, a provision for legal cases amounting to RR 4 083 million was set up at 31 December 2018 (31 December 2017: RR 1 783 million). This provision is recognised within other liabilities in the consolidated statement of financial position (Note 21).

75 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

33 Contingent Assets and Liabilities (continued)

Tax legislation. Russian tax, currency and customs legislation that is currently enacted is defined insufficiently distinctively and explicitly and, therefore, is subject to varying interpretations (that may be applied to past events as well), selective and inconsistent application and frequent and hardly predictive changes. Therefore, tax positions taken by management in relation to transactions and activities of the Group may be challenged by regional or federal authorities. As a result, the tax authorities may challenge the transactions and operations of the Group that have not been challenged before and the Group’s entities may be imposed by additional taxes, penalties and interest that may be significant.

Fiscal periods remain open to review by tax authorities for three calendar years, preceding the year of review. Under certain circumstances reviews may cover longer periods.

Currently the interpretation of some Russian tax legislation requirements in conjunction with accounting rules adjustments has not formed unambiguously. Taking into account the recent tendencies in law enforcement practice namely Russian tax authorities and courts may take a more assertive position in the application of the tax legislation during examinations of tax liabilities, the uncertainty exists about Russian tax authorities interpretation of the approach applied by the Group to tax accounting of some operations given the recent changes in accounting rules. However, it is impossible to assess the amounts of potential claims as well as probability of unfavorable outcome.

Russian transfer pricing legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions, provided that the transaction price differs from the market price. Controllable transactions include transactions with related parties and some types of transactions with unrelated parties. The Group determines its tax liabilities arising from controlling transactions based on the actual transaction prices, adjusting them to market prices, if necessary.

It is possible, with the evolution of transfer pricing rules interpretation that adequacy of controlling transactions prices used by the Group compared to the level of market prices could be challenged. The impact of any such challenge cannot be reliably estimated, however, it may be significant to the financial position and / or the operations of the Group.

The management of the Group believes that its interpretation of the legislation is appropriate and the Group’s tax, currency and customs positions will be sustained by the tax authorities. The Group believes that it has paid and accrued all taxes that are applicable.

The Group includes the companies incorporated outside of the Russian Federation (Note 37). Tax liabilities of the Group are determined on the assumption that these companies are not subject to Russian income tax, because they do not have a permanent establishment in the Russian Federation. Russian tax legislation does not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of these rules and changes interpretation by Russian tax authorities, non-taxable status of some or all of the foreign companies of the Group may be challenged. The impact of any such challenge cannot be reliably estimated, however, it may not be significant to the financial position and / or the operations of the Group.

Operating lease commitments. Where the Group acts as a lessee, future lease payments under non- cancellable operating leases are as follows:

RR million 2018 2017

Due within 1 year 409 514 Due from 1 to 5 years 210 295 Due over 5 years 199 237

Total operating lease commitments 818 1 046

76 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments

Fair value measurements are analysed and categorised by levels of fair value hierarchy as follows: (i) Level 1 are measurements at quoted prices in active markets for identical assets or liabilities, (ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability either directly or indirectly, and (iii) Level 3 measurements are valuations not based on solely observable market data. Management applies professional judgement in categorising financial instruments by fair value hierarchy. If fair value measurement uses observable inputs that require significant adjustment, it is categorised as a Level 3 measurement. Significance of valuation input is assessed against the fair value measurement in its entirety.

(a) Recurring fair value measurements

Recurring fair value measurements are those required or permitted by other IFRS at the end of each reporting period.

Levels of fair value hierarchy which recurring fair value measurements are categorised into are as follows:

31 December 2018 31 December 2017 RR million Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

FINANCIAL ASSETS

Financial assets at fair value through profit or loss

- Equity securities of non-financial organisations 1 230 - - 845 - - - Equity securities of credit organisations and foreign banks 179 - - 124 - - - Equity securities of non-credit financial organisations 14 - - 30 - - - Debt securities of non-financial organisations 14 016 539 - 4 574 - 189 - Debt securities of non-credit financial organisations 3 858 824 - 3 871 - - - Debt securities of credit organisations and foreign banks 4 063 - - 2 817 - - - Debt securities of the Russian Federation government 3 448 - - 977 - - - Debt securities of municipal organisations 1 670 - - 1 452 - - - Debt securities of foreign states 610 ------Derivative financial instruments - 2 169 2 229 - 264 1 191

Financial assets available for sale

- Equity securities of credit organisations and foreign banks 2 ------Equity securities of non-credit financial organisations 2 ------Equity securities of non-financial organisations 1 - - 2 - - - Debt securities of the Russian Federation government 19 717 - - 2 051 - - - Debt securities of non-financial organisations 18 883 - - 18 281 148 - - Debt securities of non-credit financial organisations 13 983 - - 15 175 - - - Debt securities of credit organisations and foreign banks 13 876 - - 24 084 - - - Debt securities of municipal organisations 517 - - 68 - -

NON-FINANCIAL ASSETS

Investment property - - 2 306 - - 1 386 Premises and equipment - - 8 912 - - 9 420

77 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments (continued)

Description of valuation techniques and inputs used in fair value measurement for Level 2 measurements at 31 December 2018 are set out in the table below:

RR million Fair value Valuation technique Inputs used

Financial assets at fair value through profit or loss

- Derivative financial instruments 2 169 Bloomberg quotes Price in % from nominal value - Debt securities of non-credit financial Discounted cash flows organisations 824 method Yield to maturity Discounted cash flows - Debt securities of non-financial organisations 539 method Yield to maturity

Total recurring fair value measurements at Level 2 3 532

Description of valuation techniques and inputs used in fair value measurement for Level 2 measurements at 31 December 2017 are set out in the table below:

RR million Fair value Valuation technique Inputs used

Financial assets at fair value through profit or loss

- Derivative financial instruments 264 Bloomberg quotes Price in % from nominal value

Financial assets available for sale

Discounted cash flows - Debt securities of non-financial organisations 148 method Yield to maturity

Total recurring fair value measurements at Level 2 412

78 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments (continued)

Valuation techniques and inputs used in the fair value measurement for Level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2018:

Weighted average of Reasonable Sensitivity of fair RR million Fair value Valuation technique Inputs used inputs used change value measurements

Financial assets at fair value through profit or loss

Price in % from Black-Scholes option pricing nominal value, - Derivative financial instruments 2 229 model issuer`s quotation 10,26% 2,50% 56

Non-financial assets at fair value

Combination of comparable deals approach and capitalised cash flows 112 717 RR per Investment property 2 306 method Bid prices sq.m. 5,00% 115 Combination of comparable deals approach and capitalised cash flows 164 071 RR per Premises and equipment 8 912 method Bid prices sq.m. 5,00% 446

Total recurring fair value measurements at Level 3 13 447

There were no changes in valuation techniques for Level 3 recurring fair value measurements during the years ended 31 December 2018 and 31 December 2017.

79 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments (continued)

Valuation techniques and inputs used in the fair value measurement for Level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2017:

Weighted average of Reasonable Sensitivity of fair RR million Fair value Valuation technique Inputs used inputs used change value measurements

Financial assets at fair value through profit or loss

- Debt securities of non-financial Discounted cash flows organisations 189 method Yield to maturity 8,12% 2,00% 19 Black-Scholes option pricing Price in % from - Derivative financial instruments 1 191 model nominal value 13,16% 2,50% 22

Non-financial assets at fair value

Comparative and income 106 268 RR per Investment property 1 386 approaches Bid prices sq.m. 2,00% 20 Comparative and income 153 333 RR per Premises and equipment 9 420 approaches Bid prices sq.m. 2,00% 120

Total recurring fair value measurements at Level 3 12 186

The above tables disclose sensitivity to valuation inputs for financial assets, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly. For this purpose, significance of its impact was judged with respect to profit or loss and total assets or total equity, when changes in fair value are recognised in other comprehensive income.

80 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments (continued)

Transfers between levels of fair value hierarchy are deemed to have occurred at the end of the reporting period. A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments is as follows:

2018 2017 Financial assets at fair value through Financial assets at fair value through profit or loss profit or loss Financial assets available for sale Derivative financial Derivative financial RR million Debt securities instruments Debt securities instruments Equity securities Debt securities

Fair value at 1 January 189 1 191 56 12 163 954 (Losses) / gains recognised in profit or loss - (396) - (32) - - Additions - 2 209 - 491 - - Realisation (189) (23) (56) - (160) - Transfers out of Level 3 - (1 003) - - (3) (954) Transfers into Level 3 - 251 189 720 - -

Fair value at 31 December - 2 229 189 1 191 - -

(b) Valuation processes for recurring Level 3 fair value measurements

Level 3 fair value measurements are analysed on a monthly basis. The Group considers appropriateness of valuation model inputs, as well as valuation results using various valuation methods generally recognised as standard within the financial services industry. In selecting the most appropriate valuation model the Group considers which model’s results are aligned most closely to the actual market transactions. In order to value Level 3 equity investments, the Group utilises net assets method. Level 3 debt instruments are valued at net present value of estimated future cash flows. The Group also considers liquidity, credit and market risk factors, and adjusts valuation models as deemed necessary.

81 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

34 Fair Value of Financial Instruments (continued)

(c) Assets and liabilities not measured at fair value for which fair value is disclosed

Fair values in Level 2 and Level 3 of fair value hierarchy were estimated using discounted cash flows method. Fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Fair value of investment property and land and premises was determined based on reports of independent appraisers and market data on similar properties.

Fair values analysed by levels of fair value hierarchy and carrying values of assets and liabilities not measured at fair value are as follows:

31 December 2018 31 December 2017 Carrying Carrying RR million Level 1 Level 2 Level 3 value Level 1 Level 2 Level 3 value

INSURANCE AND FINANCIAL ASSETS Deposits with banks - 207 340 - 206 792 - 125 181 - 124 065 Receivables - - 42 265 42 738 - - 35 314 36 092 Prepayments - - 599 599 - - 446 446 Financial assets held to maturity 75 562 - - 74 763 12 680 - - 12 096

Total 75 562 207 340 42 864 324 892 12 680 125 181 35 760 172 699

INSURANCE AND FINANCIAL LIABILITIES Payables - - 42 625 43 141 - - 23 846 24 170 Other financial liabilities - - 3 970 3 970 - - 1 839 1 844

Total - - 46 595 47 111 - - 25 685 26 014

For assets the Group used assumptions about counterparty’s incremental borrowing rate and prepayment rates. Liabilities were discounted at the Group’s own incremental borrowing rate. Liabilities due on demand were discounted from the first date when the amount could be required to be paid by the Group.

82 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

35 Presentation of Financial Instruments by Measurement Category

In accordance with IAS 39 Financial Instruments: Recognition and Measurement, the Group classifies financial assets into the following categories: (a) loans and receivables; (b) financial assets held to maturity; (c) financial assets available for sale; and (d) financial assets at fair value through profit or loss.

The following table provides a reconciliation of classes of financial assets with measurement categories:

Assets Total at 31 Loans and available for Assets at fair value Assets held to December RR million receivables sale through profit or loss maturity 2018

АSSETS Cash and cash equivalents 7 184 - - - 7 184 Deposits with banks 206 792 - - - 206 792 Financial assets at fair value through profit or loss - - 34 849 - 34 849 Financial assets available for sale - 66 981 - - 66 981 Receivables 2 980 - - - 2 980 Prepayments 599 - - - 599 Financial assets held to maturity - - - 74 763 74 763

TOTAL FINANCIAL ASSETS 217 555 66 981 34 849 74 763 394 148

Assets Total at 31 Loans and available for Assets at fair value Assets held to December RR million receivables sale through profit or loss maturity 2017

АSSETS Cash and cash equivalents 5 631 - - - 5 631 Deposits with banks 124 065 - - - 124 065 Financial assets at fair value through profit or loss - - 16 334 - 16 334 Financial assets available for sale - 59 809 - - 59 809 Receivables 3 442 - - - 3 442 Prepayments 446 - - - 446 Financial assets held to maturity - - - 12 096 12 096

TOTAL FINANCIAL ASSETS 133 584 59 809 16 334 12 096 221 823

At 31 December 2018 and 31 December 2017 all financial liabilities of the Group are recognised at amortised cost.

83 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

36 Related Party Transactions

For the purposes of these consolidated financial statements parties are considered to be related if one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties are associates and shareholders that have significant influence on the Group. Subsidiaries of these shareholders are treated as related parties as well.

Outstanding balances at the end of the period, as well as income and expenses for the period with related parties are as follows:

31 December 2018 31 December 2017 Shareholders Shareholders and their and their RR million subsidiaries Associates subsidiaries Associates

Cash and cash equivalents 1 076 - - - Deposits with banks 56 496 - - - Financial assets at fair value through profit or loss 1 479 - 1 006 - Financial assets available for sale 2 689 551 4 243 - Deferred acquisition costs 48 259 - - - Receivables 10 059 29 6 036 863 Financial assets held to maturity 14 696 - 315 - Assets held for sale and assets of a disposal group held for sale - 3 497 - - Insurance provisions 88 956 78 46 167 1 993 Payables 17 700 5 522 1 121 Other financial liabilities 42 - 49 2

,

2018 2017 Shareholders Shareholders and their and their RR million subsidiaries Associates subsidiaries Associates

Net premiums earned 44 259 321 40 694 1 103 Net claims incurred (22 827) (3 165) (24 874) (2 330) Acquisition costs net of commission income from ceded reinsurance (3 092) (37) (753) (96) Other insurance income - 101 26 3 Other insurance expenses - (27) - (14) Realised and unrealised gains less losses from financial assets at fair value through profit or loss (18) (4) (9) - Interest income 1 265 9 797 7 Other investment gains less losses 16 - 5 - Administrative and other operating expenses (58) (446) (155) (576) Other operating income 34 5 22 -

In the year ended 31 December 2018 the total remuneration of the Company’s key management personnel, consisting of basic salary, bonuses and compensations, amounted to RR 2 936 million (the year ended 31 December 2017: RR 2 359 million). In the year ended 31 December 2018 the total remuneration of the Group’s subsidiaries management, consisting of basic salary and bonuses, amounted to RR 286 million (the year ended 31 December 2017: RR 184 million). All remuneration to key management personnel is short-term. Short-term bonuses fall due within twelve months after the end of the period in which management rendered related services.

The Group is under significant influence of the Russian Federation Government and in the course of its ordinary operations interacts with various companies controlled by the state. The Group applied exemption described in paragraph 25 of IAS 24 Related Party Disclosures in respect of disclosure of transactions with entities under control or significant influence of the state, or entities under joint state control.

84 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

36 Related Party Transactions (continued)

Debt instruments are acquired by the Group from the related parties on an arm’s length basis.

37 Main Subsidiaries and Business Combinations

The following major subsidiaries of the Group have been included into the consolidated financial statements for the year ended 31 December 2018:

Effective percentage of Country of equity Name incorporation controlled Principal activity

JSC IC SOGAZ-Med The Russian Federation 100% OMI Intermediary services LLC SOGAZ-Medservice The Russian Federation 100% provider LLC IC SOGAZ-Life The Russian Federation 100% Life insurance LLC International Medical Centre SOGAZ The Russian Federation 100% Medical services LLC SOGAZ-PROFMEDICINE The Russian Federation 100% Medical services JSC SOGAZ Tower The Russian Federation 100% Property management SOGAZ a.d.o. NOVI SAD Serbia 51% Insurance LTD VTB Insurance The Russian Federation 100% Insurance JSC VTB Life insurance The Russian Federation 100% Life insurance LTD VTB Medical Insurance The Russian Federation 100% OMI Business and JSC REGIONGARANT The Russian Federation 100% management consulting

\

At 9 November 2018 the Group closed the deal to acquire 100% ownership interest in LTD VTB Insurance. The transaction includes all companies within Group VTB Insurance, including LTD VTB Insurance, JSC VTB Life Insurance and LTD VTB Medical Insurance. Group VTB Insurance is a provider of non-life insurance products, endowment and savings life insurance products and OMI programs administration services.

The total acquisition-date fair value of consideration is RR 70 514 million and comprises 3 components: a) 10% of ordinary shares of the Company with a provisional fair value of RR 56 024 million, b) cash deposit in the amount RR 1 004 million and c) cash in the provisional amount of RR 13 486 million (Note 20) that can be adjusted depending on the results of appraisal of certain assets of the Group. Cash portion of consideration will be paid by the Group no later than 30 June 2019.

85 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

37 Main Subsidiaries and Business Combinations (continued)

The information on the fair values of acquired assets and liabilities is as follows:

Fair value at the RR million acquisition date

Cash and cash equivalents 1 252 Deposits with banks 127 011 Financial assets at fair value through profit or loss 20 296 Financial assets available for sale 2 662 Financial assets held to maturity 44 558 Receivables 23 046 Prepayments 14 861 Current income tax prepayment 2 224 Reinsurers’ share of insurance provisions (Note 18) 13 055 Reinsurers’ share of life insurance provision 79 Reinsurers’ share of UPR 1 928 Reinsurers’ share of OCP and IBNR 11 048 Investment property (Note 14) 819 Deferred acquisition costs (Note 25) 33 918 Deferred income tax asset (Note 30) 367 Premises and equipment (Note 16) 612 Intangible assets, identified in business combination (Note 17) 50 982 Intangible assets (Note 17) 1 093 Other assets 153 Assets held for sale and assets of a disposal group held for sale 69 Insurance provisions (Note 18) (200 075) Life insurance provision (56 665) UPR (120 809) OCP and IBNR (21 801) Provision for claims handling expenses (858) Subrogation asset 52 Actuarial evaluation of future salvage materials realisation 6 Deferred commission income (Note 25) (36) Payables (23 097) Current income tax liability (73) Deferred income tax liability (Note 30) (18 034) Life insurance liabilities under investment contracts with discretionary participation feature (Note 21) (601) Other financial liabilities (12 034) Other liabilities (12 825)

Net assets of subsidiary 70 203 Goodwill related to acquisition 311

Total purchase consideration 70 514 Less: cash and cash equivalents of subsidiary acquired (1 252) Less: fair value of treasury shares repurchased from shareholders (56 024) Less: unaccomplished settlements (Note 20) (13 486)

Inflow of cash and cash equivalents resulting from acquisition of subsidiary (248)

86 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

37 Main Subsidiaries and Business Combinations (continued)

The main intangible assets, identified in business combination comprise value of acquired in-force business (PVIF asset), customer base and distribution channel right-of use.

The goodwill in the amount of RR 311 million represents future synergies expected to arise from the acquisition.

The fair value of trade receivables amounts to RR 23 046 million. The carrying amount of trade receivables is RR 23 630 million. The best estimate of non-recoverable trade receivables at the acquisition date amounts to RR 584 million.

From the date of acquisition Group VTB Insurance has contributed RR 35 177 million to gross premiums written and RR 4 975 million to the profit for the year of the Group. Had the business combination taken place at the beginning of the year, the total amount of gross premiums written by the Group would have been RR 293 362 million and profit for the year would have been 70 533 million.

At 25 January 2018 the Group obtained control over LLC Regional medical insurance company. Its principal activity is OMI in Kalinigrad.

The information on the fair values of acquired assets and liabilities is as follows:

Fair value at the RR million acquisition date

Cash and cash equivalents 25 Deposits with banks 32 Receivables 437 Intangible assets, identified in business combination (Note 17) 110 Other assets 2 OMI liabilities (437) Deferred income tax liability (Note 30) (22) Other liabilities (7)

Net assets of subsidiary 140

Total purchase consideration 140 Less: cash and cash equivalents of subsidiary acquired (25)

Outflow of cash and cash equivalents resulting from acquisition of subsidiary 115

At 12 January 2018 the Group obtained control over 99,99% share of LLC Medical company Spasenie providing medical services in Tatarstan. As a result of the business combination cash outflow was RR 7 million and intangible asset was identified in the amount of RR 9 million with respective deferred income tax liability amounted to RR 1 million.

LLC ZHASO-LIFE that was recognised at 31 December 2017 within assets held for sale and assets of a disposal group held for sale was liquidated at 1 August 2018. The total amount received as a result of liquidation was RR 278 million.

87 SOGAZ GROUP Notes to the Consolidated Financial Statements – 31 December 2018

37 Main Subsidiaries and Business Combinations (continued)

At 31 December 2017 the following major subsidiaries of the Group have been included into the consolidated financial statements for the year ended 31 December 2017:

Effective percentage of Country of equity Name incorporation controlled Principal activity

JSC IC SOGAZ-Med The Russian Federation 100% OMI LLC SOGAZ-Medservice Intermediary services The Russian Federation 100% provider LLC IC SOGAZ-Life The Russian Federation 100% Life insurance LLC International Medical Centre SOGAZ The Russian Federation 100% Medical services LLC SOGAZ-PROFMEDICINE The Russian Federation 100% Medical services JSC SOGAZ Tower The Russian Federation 100% Property management SOGAZ a.d.o. NOVI SAD Serbia 51% Insurance Insurance Company ZhASO The Russian Federation 100% Insurance LLC ZHASO-LIFE The Russian Federation 100% Insurance JSC IC REGIONGARANT The Russian Federation 100% Insurance

In the first and the second quarters of the year ended 31 December 2017 the Group sold out JSC YUZHURALZHASO and LLC SOGAZ-Realty, respectively. As a result of LLC SOGAZ-Realty sale a disposal of treasury shares in the amount of RR 770 million was recognised in equity. Proceeds from disposal of the above mentioned subsidiaries are immaterial for the consolidated financial statements.

JSC IC Transneft was liquidated at 17 October 2017.

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